Financial Management | Chapter 2 | Part 1 | MBA MCQs | FM

Finacial Management MCQs

  

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1. A firm is considering three different financing alternatives -- debt, preferred stock, and common equity. The firm has created an EBIT-EPS chart that shows several indifference points. What does each indifference point show the firm?
   1.   None of the above.
   2.   It shows the level of EBIT and EPS at which DFL is identical under two alternative financing plans.
   3.   The level of EBIT that generates identical EPS under two alternative financing plans.
   4.   The level of sales that generates identical EBIT and EPS figures.
2. Higher operating leverage is related to the use of additional __________.
   1.   common equity financing
   2.   debt financing
   3.   fixed costs
   4.   variable costs
3. A firm has a DFL of 3.5 at X dollars. What does this tell us about the firm?
   1.   If EBIT rises by 3.5% at the firm, then EPS will rise by 1%.
   2.   If EBIT rises by 1% at the firm, then EPS will rise by 3.5%.
   3.   If sales rise by 3.5% at the firm, then EBIT will rise by 1%.
   4.   If sales rise by 1% at the firm, then EBIT will rise by 3.5%.
4. Which of the following statements is correct?
   1.   The coefficient of variation of EBIT, CVEBIT, is a measure of relative financial risk.
   2.   The coefficient of variation of EPS, CVEPS, is a measure of relative total firm risk.
   3.   Total firm risk equals business risk times financial risk.
   4.   A relative measure of relative business risk equals the difference, CVEPS - CVEBIT
5. A firm has a DOL of 3.5 at Q units. What does this tell us about the firm?
   1.   If sales rise by 1% at the firm, then EBIT will rise by 3.5%.
   2.   If sales rise by 3.5% at the firm, then EBIT will rise by 1%.
   3.   If EBIT rises by 1% at the firm, then EPS will rise by 3.5%.
   4.   If EBIT rises by 3.5% at the firm, then EPS will rise by 1%.
6. Which of the following formulas represents a correct calculation of the degree of operating leverage?
   1.   (EBIT) / (EBIT - FC)
   2.   [Q(P-V) + FC] / [Q(P-V) ]
   3.   (Q - QBE)/Q
   4.   [Q(P-V)] / [Q(P-V) - FC]
7. Which of the following statements is not correct regarding the calculation of the degree of total leverage (DTL)?
   1.   DTLQ units = DOLQ units x DFLEBIT of X dollars
   2.   DTLS dollars = CVEBIT x DFLE(EBIT)
   3.   DTLS dollars = (EBIT + FC ) / {EBIT - I - [PD/(I-T)]};
   4.   DTLQ units = Q(P-V) / {Q(P-V) - FC - I - [PD/(I-T)]}
8. Which of the following ratings apply to an investment grade quality security?
   1.   BBB rating by Standard and Poor's.
   2.   Ba rating by Moody's.
   3.   Both the first and second answers are ratings that are considered investment grade.
   4.   B rating by Standard and Poor's.
9. Which of the following statements is not correct as it relates to acceptable alternatives to analyzing the appropriate financing mix for a firm (other than the basic DOL, DFL, and DTL)?
   1.   Comparison of industry capital structure ratios.
   2.   Examine the ratings of the firm's securities by various rating services.
   3.   Check the company's Dun & Bradstreet composite credit appraisal.
   4.   Talk with what investment professionals such as analysts, institutions, and investment bankers believe.
10. Which of the following formulas represents the correct calculation of the degree of financial leverage?
    1.   All of the above are correct methods to calculate the degree of financial leverage (DFL).
    2.   EBIT / [ NI - I - PD/(1-T) ]
    3.   EBIT / [ EBIT - I - PD/(1-T) ]
    4.   [ NI + T + I ] / [ NI - I - PD/(1-T) ]
11. Calculate the degree of financial leverage (DFL) for a firm when its EBIT is $2,000,000. The firm has $3,000,000 in debt that costs 10% annually. The firm also has a 9%, $1,000,000 preferred stock issue outstanding. The firm pays 40% in taxes.
    1.   1.29
    2.   0.78
    3.   0.80
    4.   1.24
12. Calculate the degree of operating leverage (DOL) at 400,000 units of quantity sold. The firm has $1,000,000 in fixed costs. The firm anticipates selling each unit for $25 with variable costs of $5 per unit.
    1.   1.25
    2.   3.33
    3.   There is not sufficient information provided to calculate the degree of operating leverage (DOL).
    4.   1.14
13. The cash required during a specific period to meet interest expenses and principal payments is referred to as the:
    1.   adequacy capacity
    2.   fixed-charge burden
    3.   debt capacity
    4.   debt-service burden
14. Which of the following costs would be considered a fixed cost?
    1.   Raw materials.
    2.   Bad-debt losses.
    3.   Production labor
    4.   Depreciation.
15. Calculate the degree of total leverage (DTL) for a firm that has $10 million in sales. The firm has EBIT of $2,000,000 after accounting for $1,000,000 in fixed costs. The firm has $3,000,000 in debt that costs 10% annually. The firm also has a 9%, $1,000,000 preferred stock issue outstanding. The firm pays 40% in taxes.
    1.   1.94
    2.   2.16
    3.   1.86
    4.   1.45
16. The maximum amount of debt (and other fixed-charge financing) that a firm can adequately service is referred to as the __________.
    1.   fixed-charge burden
    2.   debt capacity
    3.   debt-service burden
    4.   adequacy capacity
17. Calculate the break-even (quantity) point given the following information. The firm has $1,000,000 in fixed costs. The firm produces only one product and anticipates selling each unit for $25 with variable costs of $5 per unit
    1.   There is not sufficient information provided to calculate the sales break-even point
    2.   40,000
    3.   200,000
    4.   50,000
18. Lower financial leverage is related to the use of additional __________..
    1.   variable costs
    2.   debt financing
    3.   common equity financing
    4.   fixed costs
19. Calculate the break-even point for sales revenues given the following information. The firm has $1,000,000 in fixed costs. The firm anticipates that variable costs will be $1 for every $5 in sales.
    1.   $1,250,000
    2.   $250,000
    3.   $1,000,000
    4.   $200,000
20. In the context of operating leverage break-even analysis, if selling price per unit falls and all other variables remain constant, the operating break-even point in units will __________.
    1.   rise
    2.   fall
    3.   stay the same