Question Details

Capital Structure and Leverage


1. The mix of debt, preferred stock, and common equity with which the firm plans to raise capital is called the:
a. financial risk.
b. operating leverage.
c. business risk.
d. target capital structure.

2. The target capital structure is affected by which of the following factors?
a. business risk
b. the firm- tax position
c. financial flexibility considerations
d. managerial attitudes (conservatism or aggressiveness)
e. all of the above


3. 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.


4. The extent to which fixed costs are used in a firm- operations is called its:
a. financial leverage.
b. operating leverage.
c. financial leverage.
d. foreign risk exposure.


5. Which of the following does not affect a firm- business risk?
a. The level of uncertainty about future sales.
b. The degree of operating leverage.
c. The degree of financial leverage.


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