Objective type questions on leverages

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Reference no: EM1311042

1) As fixed operating costs increase and all other factors are held constant, the degree of operating leverage will

A. increase

B. decrease

C. remain unchanged

D. change in an undetermined direction

2) As debt is substituted for equity in the capital structure and the debt ratio increases, the behaviour of the overall cost of capital is partially explained by

A. the tax-deductibility of interest payments

B. the increase in the number of common shares outstanding

C. the reduction in risk as perceived by the common share holders

D. the decrease in the cost of equity

3) The firm has a beta 1.2. The market return equals 14% and the risk-free rate of return equals 6%. The estimated cost of common stock equity is

A. 6%

B. 7.2%

C. 14%

D. 15.6%

4) The major short coming of the EBIT-EPS approach to capital structure is that

A. the technique does not promote the maximization of shareholders wealth.

B. The technique does not consider the cost of capital.

C. The technique only considers leverage - related risk

D. The technique does not maximize earnings per share

5) The conflict resulting from a managers desire to increase the firm's risk without increasing current borrowing costs and lenders desire to limit lending is one effect of the ______________ problem.

A. agency

B. leverage

C. capital

D. variable cost

6) A stock spilt has ___________ effect on the firm's capital structure

A. little

B. no

C. a measurable

D. detrimental

Reference no: EM1311042

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