BAM313 unt 4 exam

1. A high degree of variability in a firm's earnings before interest and taxes refers to:

a. business risk

b. financial leverage

c. operating leverage

d. financial risk

2. If a firm has no operating leverage and no financial leverage, then a 10% increase in sales willhave what effect on EPS?

a. EPS will increase by 10%

b. EPS will remain the same

c. EPS will increase by less than 10%

d. EPS will decrease by 10%

3. According to the moderate view of capital costs and financial leverage, as the use of debtfinancing increases:

a. the cost of capital continuously increases

b. there is an optimal level of debt financing

c. the cost of capital remains constant

d. the cost of capital continuously decreases

4. The primary weakness of EBIT-EPS analysis is that:

a. it double counts the cost of debt financing

b. it applies only to firms with large amounts of debt in their capital structure

c. it may only be used by firms that are profitable this year

d. it ignores the implicit cost of debt financing

5. Potential applications of the break-even model include:

a. optimizing the cash-marketable securities position of a firm

b. replacement for time-adjusted capital budgeting techniques

c. pricing policy

d. Allof the above.