Question Details

firm's operations





											
1.Which of the following statements is CORRECT? 											
a.The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC). 											
b.The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share. 											
c.The capital structure that maximizes the stock price is also the capital structure that maximizes the firm's times interest earned (TIE) ratio. 											
d.Increasing a company's debt ratio will typically reduce the marginal costs of both debt and equity financing; however, this still may raise the company's WACC. 											
e. If Congress were to pass legislation that increases the personal tax rate but decreases the corporate tax rate, this would encourage companies to increase their debt ratios.											
											
											
2. Business risk is affected by a firm's operations. Which of the following is NOT associated with (or does not contribute to) business risk? 											
a. Demand variability. 											
b. Sales price variability. 											
c. The extent to which operating costs are fixed. 											
d. The extent to which interest rates on the firm's debt fluctuate. 											
e. Input price variability.											
											
											
3. If debt financing is used, which of the following is CORRECT?											
a. The percentage change in net operating income will be greater than a given percentage change in net income.											
b. The percentage change in net operating income will be equal to a given percentage change in net income.											
c. The percentage change in net income relative to the percentage change in net operating income will depend on the interest rate charged on debt.											
d. The percentage change in net income will be greater than the percentage change in net operating income.											
e. The percentage change in sales will be greater than the percentage change in EBIT, which in turn will be greater than the percentage change in net income.											
											
											
4. Vu Enterprises expects to have the following data during the coming year. What is Vu's expected ROE?											
Assets $200,000 Interest rate 8%											
D/A 65% Tax rate 40% EBIT $25,000											
a. 12.51%											
b. 13.14%											
c. 13.80%											
d. 14.49%											
e. 15.21%											
											
											




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