TB_Chapter13-1.doc

CAP#TA$ %T&CT&E CHAPTEA'D !" $EEAE (Difficulty: (Difficul ty: E = Easy, M = Medium, and T = Tough)

Multiple Choice: Conceptual  Easy:  Easy: Business risk 1

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Fina Financ ncia ial l risk risk. . Tota Total l ris risk. k. Busi Busine ness ss risk risk. . Mark Market et ris risk. k. None None of the the above above is cor corre rect ct. . above.!

Business risk .

Answer: d

Diff: E

&e#and &e#and variab variabili ility. ty. 'ales 'ales rice rice vari variabi abilit lity. y. The etent etent to which oerat oerating ing costs costs are fied. fied. )hanges )hanges in re*uired re*uired returns returns due to financing financing decision decisions. s. The ability ability to to change change rices rices as costs costs change. change.

Business risk .

(It (It will will affec affect t each each tye tye of risk risk

Busi Busine ness ss risk risk is conc concer erne ned d with with the the oer oerat atio ions ns of the the fir# fir#. . $hic $hich h of the the following is not associated with (or not a art of! business risk% a. b. c. d. e.

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Diff: E

A dec decre reas ase e in in the the debt debt rati ratio o wil will l gen gener eral ally ly have have no eff effec ect t on . a. b. c. d. e.

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Answer: c

Answer: d

Diff: E

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$hic $hich h of of the the foll follow owin ing g fac facto tors rs woul would d aff affec ect t a co# co#a any ny,s ,s bus busin ines ess s ris risk% k% a. b. c. d. e.

The level level of uncertainty uncertainty regardi regarding ng the de#and de#and for its roduct. roduct. The degree degree of oerating oerating leverage. leverage. The a#ount a#ount of debt in its caital caital structu structure. re. 'tate# 'tate#ent ents s a and b are are correc correct. t. All of of the state# state#ents ents above above are are correct. correct.

Chapter 13- Page 1

Business and financial risk -

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Answer: d

Di Diff: E

$hic $hich h of of the the foll follow owin ing g stat state# e#en ents ts is #ost #ost corr correc ect% t% a. A fir# fir#,s ,s busin usines ess s ris risk is sole solely ly det deter#i er#ine ned d by the the fina financ ncia ial l characteristics of its industry. b. The factors factors that affect affect a fir#,s busines business s risk are deter#ine deter#ined d artly by indu indus stry try char charac acte teri rist stic ics s and and art artly ly by econ econo# o#ic ic condi onditi tion ons. s. nfortunately/ these and other factors that affect a fir#,s business risk are not sub0ect to any degree of #anagerial control. c. ne of the benef benefits its to a fir# of being being at or near its targe target t caital caital structure is that financial fleibility beco#es #uch less i#ortant. d. The fir#,s fir#,s financial financial risk #ay have both both #arket risk risk and diversifiab diversifiable le risk co#onents. e. None of the state#ents state#ents above is correct. correct.

Optimal capital structure 2

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Answer: e

Diff: E

$hic $hich h of of the the foll follow owin ing g stat state# e#en ents ts is #ost #ost corr correc ect% t% a. As a rule/ rule/ the oti#a oti#al l caita caital l struct structure ure is found by deter# deter#ini ining ng the debt3e*uity #i that #ai#i4es eected 56'. b. The The oti oti#a #al l cai caita tal l stru struct ctur ure e si#u si#ult ltan aneo eous usly ly #ai #ai#i #i4e 4es s 56' 56' and and #ini#i4es the $A)). c. The oti#al oti#al caital caital structure structure #ini#i4 #ini#i4es es the cost of e*uity/ e*uity/ which which is a necessary condition for #ai#i4ing the stock rice. d. The oti#al oti#al caita caital l struct structure ure si#ultan si#ultaneou eously sly #ini#i4e #ini#i4es s the cost of debt/ the cost of e*uity/ and the $A)). e. None of the state#ents state#ents above is correct. correct.

Optimal capital structure 7

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Answer: c

Fro Fro# the info infor r#ati #ation on belo below/ w/ Minnow 5ntertain#ent )o#any. a. b. c. d. e.

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5*uity 5*uity 5*uity 5*uity 5*uity 5*uity 5*uity 5*uity 5*uity 5*uity

8 8 8 8 8

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56' 56' 56' 56' 56'

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