6.As financial leverage increases, what will be the impact on the expected rate of return and financial risk? Expected Return Financial Risk A) Falls Falls B) Rises Falls C) Rises Rises D) Falls Rises The correct answer was C) Expected Return Financial Risk A) Falls Falls B) Rises Falls C) Rises Rises D) Falls Rises The correct answer was C) A higher breakeven point resulting from increased interest costs associated with debt financing increases the risk of the company. Since the risk is tied to firm financing, it is referred to as financial risk. Given the positive risk-return relationship, the expected return of the company’s common stock also rises. 7.The uncertainty in return on assets due to the nature of a firm’s operations is known as: A) tax efficiency. B) financial leverage. C) business risk. D) financial flexibility. The correct answer was C) Business risk is a function of the firm's revenue and expenses, resulting in operating income, or earnings before interest and taxes (EBIT). The main factors affecting business risk are demand variability, sales price variability, input price variability, ability to adjust output prices, and operating leverage. Tax efficiency is tied to mutual fund investing, while both financial leverage and financial flexibility require the existence of debt. 8.The two major types of risk affecting a firm are: A) business risk and financial risk. B) financial risk and cash flow risk. C) bankruptcy risk and cash flow risk. D) business risk and collection risk. The correct answer was A) Business risk is the uncertainty regarding the operating income of a company. Financial risk refers to the uncertainty caused by the fixed cost associated with borrowed money. 9.Variability in a firm’s operating income is most closely related to its: A) financial risk. B) external risk. C) internal risk. D) business risk. The correct answer was D) Business risk is the uncertainty regarding the operating income of a company. Financial risk refers to the uncertainty caused by the fixed cost associated with borrowed money. 10.Which of the following statements about business risk and financial risk is least accurate? A) Factors that affect business risk are demand, sales price, and input price variability. B) The greater a company's business risk, the higher its optimal debt ratio. C) Financial risk is the additional risk borne by the common stockholders as a result of the decision to use debt. D) Business risk is the riskiness of the company's assets if it uses no debt. The correct answer was B) The greater a company’s business risk, the lower its optimal debt ratio. 11.All else equal, a firm's business risk is higher when: A) variable costs are the highest portion of its expense. B) variable and fixed costs are roughly in the same proportion. C) fixed costs are the highest portion of its expense. D) the firm has low operating leverage. The correct answer was C) The higher the percentage of a firm's costs that are fixed, the higher the operating leverage, and the greater the firm's business risk and the more susceptible it is to business cycle fluctuations.
[此贴子已经被作者于2008-4-17 18:11:39编辑过] | 
发表于 2008-4-17 18:10
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