Finance and Capital Structure

Topics: Finance, Stock, Modigliani-Miller theorem Pages: 14 (4296 words) Published: July 19, 2013
Chapter 13: Capital Structure and Leverage

1. The mix of debt, preferred stock, and common equity with which the firm plans to raise capital is called the: a. financial risk.
Incorrect. The mix of debt, preferred stock, and common equity with which the firm plans to raise capital is called the target capital structure. b. operating leverage.
Incorrect. The mix of debt, preferred stock, and common equity with which the firm plans to raise capital is called the target capital structure. c. business risk.
Incorrect. The mix of debt, preferred stock, and common equity with which the firm plans to raise capital is called the target capital structure. d. target capital structure.
Correct. The mix of debt, preferred stock, and common equity with which the firm plans to raise capital is called the target capital structure.

2. The target capital structure is affected by which of the following factors? a. business risk
Incorrect. The target capital structure is affected by business risk, the firm’s tax position, financial flexibility considerations, and managerial attitudes (conservatism or aggressiveness). b. the firm’s tax position

Incorrect. The target capital structure is affected by business risk, the firm’s tax position, financial flexibility considerations, and managerial attitudes (conservatism or aggressiveness). c. financial flexibility considerations

Incorrect. The target capital structure is affected by business risk, the firm’s tax position, financial flexibility considerations, and managerial attitudes (conservatism or aggressiveness). d. managerial attitudes (conservatism or aggressiveness)

Incorrect. The target capital structure is affected by business risk, the firm’s tax position, financial flexibility considerations, and managerial attitudes (conservatism or aggressiveness). e. all of the above

Correct. The target capital structure is affected by business risk, the firm’s tax position, financial flexibility considerations, and managerial attitudes (conservatism or aggressiveness).

3. Business risk is concerned with the operations of the firm. Which of the following is not associated with (or not a part of) business risk? a. Demand variability.
Incorrect. Demand variability is a determinant of business risk. b. Sales price variability.
Incorrect. Sales price variability is a determinant of business risk. c. The extent to which operating costs are fixed.
Incorrect. The extent to which operating costs are fixed is a determinant of business risk. d. Changes in required returns due to financing decisions.
Correct. Business risk does not consider financing decisions.

4. The extent to which fixed costs are used in a firm’s operations is called its: a. financial leverage.
Incorrect. The extent to which fixed costs are used in a firm’s operations is called its operating leverage. b. operating leverage.
Correct. The extent to which fixed costs are used in a firm’s operations is called its operating leverage. c. financial leverage.
Incorrect. The extent to which fixed costs are used in a firm’s operations is called its operating leverage. d. foreign risk exposure.
Incorrect. The extent to which fixed costs are used in a firm’s operations is called its operating leverage.

5. Which of the following does not affect a firm’s business risk? a. The level of uncertainty about future sales.
Incorrect. Sales uncertainty is a determinant of business risk. b. The degree of operating leverage.
Incorrect. The degree of operating leverage is based on the level of fixed costs which is a determinant of business risk. c. The degree of financial leverage.
Correct. Financial leverage is not a determinant of business risk.

6. Which of the following statements is most correct?
a. Increasing financial leverage is one way to increase a firm’s revenues. Incorrect. Financial leverage affects net income, not sales. b. Firms with lower fixed costs tend to have greater operating leverage. Incorrect....
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