Firm degree of financial leverage-affect earnings per share

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Reference no: EM131526901

Question 1 If you knew the stock market was going to increase next year, which of the following portfolios should you purchase (according to CAPM theory)?

A portfolio with a beta of 1

A portfolio with a beta of -1

A portfolio with a beta of 0

A portfolio with a beta of 2

Question 2 If a firm's degree of financial leverage (DFL) is 3, how will a 3% increase in earnings before interest and taxes (EBIT) affect earnings per share (EPS)?

EPS will rise 27%.

EPS will rise 3%.

EPS will rise 9%.

DFL will not affect this relationship.

Question 3 If interest rates rise, what will happen to a standard bond (all else being equal)?

Interest payments will go down.

The price will go down.

The price will go up.

Interest payments will go up.

Question 4 __________ leverage magnifies the effect of changes in sales on earnings before interest and taxes.

Financial

Put

Total or Combined

Operating

Question 5 Estimate the required rate of return on a company's stock given a stock price of $20 per share, an expected dividend of $2 per share at the end of the year, and a 3% dividend growth rate.

3 percent

7 percent

13 percent

10 percent

Question 6 The beta of the market portfolio is:

greater than 1.

changes yearly.

Question 7Typically investors and corporate managers require greater return when risk increases. This is called being:

indifferent to risk.

risk-seeking.

investment grade.

risk-averse.

Question 8 The portfolio that maximizes return for a given level of risk or minimizes risk for a given level of return is called the __________ portfolio.

risk-free

investment banker

Efficient

Frontier

Question 9 What is the net present value of a $10,000 initial investment with future cash flows that have a present value of $12,000?

$22,000

-$2,000

$2,000

$10,000

Question 10 Foreign sales expose a firm to:

reduced translation exposure.

exchange risk and political risk.

reduced transaction exposure.

reduced translation and transaction exposure..

Question 11 Foreign exchange risk is primarily the risk that:

transactions and assets using foreign currencies will lose value because of changes in currency exchange rates.

overseas assets will be nationalized.

exchanges made in foreign countries will create losses in the foreign currency.

foreign governments will limit economic exchanges.

Question 12 In the U.S., who owns a corporation?

Stockholders

Employees

Board of directors

U.S. government

Question 13 In the U.S., about 75% of all businesses are:

limited partnerships.

sole proprietorships

corporations.

partnerships.

Question 14 According to the constant growth valuation (Gordon) model, the value of a share of common stock is equal to the:

present value of all expected future dividends.

assets minus debts.

future stock price discounted at the cost of equity.

present value of all future cash flows.

Question 15 If the NPV of a project is positive, the IRR is __________ the cost of capital.

riskier than

less than

greater than

equal to

Question 16The future value of $100 today earning 6% for three years is:

$119.

$129.

$108.

$98.

Question 17 What is a characteristic of an efficient market?

Prices slowly adjust to reflect new information.

Prices quickly adjust to reflect new information.

Prices are unrelated to true value.

Prices are unaffected by new information.

Question 18 In the U.S., what form of business organization generates a substantial majority of revenue and profits?

Sole proprietorships

Limited partnerships

Partnerships

Corporations

Question 19 What impact will an increase in risk usually have on the required rate of return on an investment?

An increase and then a decrease

An increase

A decrease

No impact

Question 20 Estimate the required rate of return on a company's stock given the firm's beta of 1.5, a market return of 10%, and a risk-free rate of 4%.

14 percent

15 percent

16 percent

13 percent

Reference no: EM131526901

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