Capital Structure and Leverage. Ch 13
CHAPTER 13
CAPITAL STRUCTURE AND LEVERAGE (Difficulty: E = Easy, M = Medium, and T = Tough)
Multiple Choice: Conceptual
Easy:
Business risk Answer: c Diff: E
[i]. 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
[ii]. 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
[iii]. 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.
Business and financial risk Answer: d Diff: E
[iv]. 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.
CAPITAL STRUCTURE AND LEVERAGE (Difficulty: E = Easy, M = Medium, and T = Tough)
Multiple Choice: Conceptual
Easy:
Business risk Answer: c Diff: E
[i]. 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
[ii]. 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
[iii]. 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.
Business and financial risk Answer: d Diff: E
[iv]. 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.