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    Capital Structure and Leverage: Multiple Choice: Conceptual

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    Kristel Sumabat
    This document contains a chapter about capital structure and leverage that includes 7 multiple choice questions about business risk, financial risk, and optimal capital structure. The questions cover topics such as factors that affect business risk, distinguishing business risk from other types of risk, and identifying the capital structure that maximizes stock price while minimizing the weighted average cost of capital.

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    Capital Structure and Leverage: Multiple Choice: Conceptual

    Uploaded by

    Kristel Sumabat
    95 views2 pages
    This document contains a chapter about capital structure and leverage that includes 7 multiple choice questions about business risk, financial risk, and optimal capital structure. The questions cover topics such as factors that affect business risk, distinguishing business risk from other types of risk, and identifying the capital structure that maximizes stock price while minimizing the weighted average cost of capital.

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    TB_Chapter13-Capital-Structure-and-Leverage

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    This document contains a chapter about capital structure and leverage that includes 7 multiple choice questions about business risk, financial risk, and optimal capital structure. The questions cover topics such as factors that affect business risk, distinguishing business risk from other types of risk, and identifying the capital structure that maximizes stock price while minimizing the weighted average cost of capital.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    95 views2 pages

    Capital Structure and Leverage: Multiple Choice: Conceptual

    Uploaded by

    Kristel Sumabat
    This document contains a chapter about capital structure and leverage that includes 7 multiple choice questions about business risk, financial risk, and optimal capital structure. The questions cover topics such as factors that affect business risk, distinguishing business risk from other types of risk, and identifying the capital structure that maximizes stock price while minimizing the weighted average cost of capital.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    CHAPTER 13

    CAPITAL STRUCTURE AND LEVERAGE

    (Difficulty: E = Easy, M = Medium, and T = Tough)

    Multiple Choice: Conceptual

    Easy:
    Business risk Answer: c Diff: E
    1. A decrease in the debt ratio will generally have no effect on
    .

    a. Financial risk.
    b. Total risk.
    c. Business risk.
    d. Market risk.
    e. None of the above is correct. (It will affect each type of risk
    above.)

    Business risk Answer: d Diff: E


    2. 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.
    b. Sales price variability.
    c. The extent to which operating costs are fixed.
    d. Changes in required returns due to financing decisions.
    e. The ability to change prices as costs change.

    Business risk Answer: d Diff: E N


    3. Which of the following factors would affect a company’s business risk?

    a. The level of uncertainty regarding the demand for its product.


    b. The degree of operating leverage.
    c. The amount of debt in its capital structure.
    d. Statements a and b are correct.
    e. All of the statements above are correct.

    Chapter 13- Page 1


    Business and financial risk Answer: d Diff: E
    4. Which of the following statements is most correct?

    a. A firm’s business risk is solely determined by the financial


    characteristics of its industry.
    b. The factors that affect a firm’s business risk are determined partly by
    industry characteristics and partly by economic conditions.
    Unfortunately, these and other factors that affect a firm’s business
    risk are not subject to any degree of managerial control.
    c. One of the benefits to a firm of being at or near its target capital
    structure is that financial flexibility becomes much less important.
    d. The firm’s financial risk may have both market risk and diversifiable
    risk components.
    e. None of the statements above is correct.

    Optimal capital structure Answer: e Diff: E


    5. Which of the following statements is most correct?

    a. As a rule, the optimal capital structure is found by determining the


    debt-equity mix that maximizes expected EPS.
    b. The optimal capital structure simultaneously maximizes EPS and
    minimizes the WACC.
    c. The optimal capital structure minimizes the cost of equity, which is a
    necessary condition for maximizing the stock price.
    d. The optimal capital structure simultaneously minimizes the cost of
    debt, the cost of equity, and the WACC.
    e. None of the statements above is correct.

    Optimal capital structure Answer: c Diff: E


    6. From the information below, select the optimal capital structure for
    Minnow Entertainment Company.

    a. Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.


    b. Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.
    c. Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.
    d. Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.
    e. Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.

    Optimal capital structure Answer: e Diff: E


    7. Which of the following statements best describes the optimal capital
    structure?

    a. The optimal capital structure is the mix of debt, equity, and preferred
    stock that maximizes the company’s earnings per share (EPS).
    b. The optimal capital structure is the mix of debt, equity, and preferred
    stock that maximizes the company’s stock price.
    c. The optimal capital structure is the mix of debt, equity, and preferred
    stock that minimizes the company’s weighted average cost of capital
    (WACC).
    d. Statements a and b are correct.
    e. Statements b and c are correct.

    Chapter 13 - Page 2

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