Chapter 12 Determining the Financing Mix

1) Business risk refers to the relative dispersion of a firm's earnings before interest and taxes.

2) Private equity funds tend to focus their investments in situations where promised returns are very high and the need for funds is brief.

3) The three major components responsible for variation in a company's income stream are business risk, operating risk, and financial risk.

4) Sales of consumer durable goods, such as appliances, are more sensitive to swings in the business cycle, and therefore companies in these industries face a higher level of operating risk.

5) Variation in a company's income stream results from its choice of business line, its choice of an operating cost structure, and its choice of a capital structure.

6) Business risk refers to the relative dispersion (variability) of a company's net income.

7) Corporations utilize external financing either because they do not have sufficient earnings to reinvest or they want to rebalance their capital structures.

8) Companies that sell basic necessities face the highest levels of business risk because consumers will price shop aggressively for items they purchase on a regular basis.

9) The four basic determinants of business risk include all of the following EXCEPT

A) the stability of the domestic economy.

B) the level of fixed cost used in the company's production process.

C) sensitivity to the business cycle.

D) competitive pressures in the firm's industry.

10) A high degree of variability in a firm's earnings before interest and taxes refers to

A) business risk.

B) financial risk.

C) financial leverage.

D) operating leverage.