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

Finacial Management MCQs

  

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1. Which of the following statements is correct?
   1.   A relative measure of relative business risk equals the difference, CVEPS - CVEBIT
   2.   Total firm risk equals business risk times financial risk.
   3.   The coefficient of variation of EPS, CVEPS, is a measure of relative total firm risk.
   4.   The coefficient of variation of EBIT, CVEBIT, is a measure of relative financial risk.
2. Which of the following formulas represents the correct calculation of the degree of financial leverage?
   1.   [ NI + T + I ] / [ NI - I - PD/(1-T) ]
   2.   EBIT / [ EBIT - I - PD/(1-T) ]
   3.   EBIT / [ NI - I - PD/(1-T) ]
   4.   All of the above are correct methods to calculate the degree of financial leverage (DFL).
3. The cash required during a specific period to meet interest expenses and principal payments is referred to as the:
   1.   debt capacity
   2.   fixed-charge burden
   3.   debt-service burden
   4.   adequacy capacity
4. 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.   $200,000
   2.   $250,000
   3.   $1,000,000
   4.   $1,250,000
5. 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.   Talk with what investment professionals such as analysts, institutions, and investment bankers believe.
   3.   Examine the ratings of the firm's securities by various rating services.
   4.   Check the company's Dun & Bradstreet composite credit appraisal.
6. 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 EBIT rises by 3.5% at the firm, then EPS will rise by 1%.
   3.   If sales rise by 3.5% at the firm, then EBIT will rise by 1%.
   4.   If EBIT rises by 1% at the firm, then EPS will rise by 3.5%.
7. Which of the following formulas represents a correct calculation of the degree of operating leverage?
   1.   [Q(P-V)] / [Q(P-V) - FC]
   2.   [Q(P-V) + FC] / [Q(P-V) ]
   3.   (Q - QBE)/Q
   4.   (EBIT) / (EBIT - FC)
8. The maximum amount of debt (and other fixed-charge financing) that a firm can adequately service is referred to as the __________.
   1.   debt capacity
   2.   adequacy capacity
   3.   debt-service burden
   4.   fixed-charge burden
9. Which of the following ratings apply to an investment grade quality security?
   1.   Ba rating by Moody's.
   2.   BBB rating by Standard and Poor's.
   3.   Both the first and second answers are ratings that are considered investment grade.
   4.   B rating by Standard and Poor's.
10. A firm has a DFL of 3.5 at X dollars. What does this tell us about the firm?
    1.   If sales rise by 3.5% at the firm, then EBIT will rise by 1%.
    2.   If sales rise by 1% at the firm, then EBIT will rise by 3.5%.
    3.   If EBIT rises by 3.5% at the firm, then EPS will rise by 1%.
    4.   If EBIT rises by 1% at the firm, then EPS will rise by 3.5%.
11. 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.   stay the same
    2.   rise
    3.   fall
12. Higher operating leverage is related to the use of additional __________.
    1.   common equity financing
    2.   variable costs
    3.   debt financing
    4.   fixed costs
13. 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.   1.14
    2.   1.25
    3.   3.33
    4.   There is not sufficient information provided to calculate the degree of operating leverage (DOL).
14. Which of the following statements is not correct regarding the calculation of the degree of total leverage (DTL)?
    1.   DTLS dollars = (EBIT + FC ) / {EBIT - I - [PD/(I-T)]};
    2.   DTLS dollars = CVEBIT x DFLE(EBIT)
    3.   DTLQ units = DOLQ units x DFLEBIT of X dollars
    4.   DTLQ units = Q(P-V) / {Q(P-V) - FC - I - [PD/(I-T)]}
15. 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.   50,000
    2.   40,000
    3.   200,000
    4.   There is not sufficient information provided to calculate the sales break-even point
16. 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.   The level of sales that generates identical EBIT and EPS figures.
    2.   The level of EBIT that generates identical EPS under two alternative financing plans.
    3.   None of the above.
    4.   It shows the level of EBIT and EPS at which DFL is identical under two alternative financing plans.
17. Which of the following costs would be considered a fixed cost?
    1.   Depreciation.
    2.   Raw materials.
    3.   Bad-debt losses.
    4.   Production labor
18. 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.   0.80
    2.   1.24
    3.   0.78
    4.   1.29
19. Lower financial leverage is related to the use of additional __________..
    1.   debt financing
    2.   variable costs
    3.   common equity financing
    4.   fixed costs
20. 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.   1.86
    2.   2.16
    3.   1.94
    4.   1.45