Reference no: EM131532750
1. Which of the following statements is true of the optimal capital structure?
It is found by determining the debt-equity mix that maximizes expected EPS.
It simultaneously maximizes EPS and minimizes the WACC.
It minimizes the cost of equity, which is a necessary condition for maximizing the stock price.
It simultaneously minimizes the cost of debt, the cost of equity, and the WACC.
It should have the combination of debt and equity thatwill maximize the price of the firm's stock.
2. Which of the following is an indication of a firm's risk with its capital structure?
Indifference point
Coefficient of variation
Earnings per share
Net operating income
Weighted average cost of capital
3. Which of the following is an advantage of debt financing?
Interest charges on debt is very minimal.
Interest charges on debt are tax deductible.
Interest charges on debt are based on the net income of the firm.
The higher the interest charges, the lower the bankruptcy costs.
Firms that are entirely debt financed have to pay very minimal taxes.
4. Which of the following is an example of business risk?
Default risk
Prepayment risk
Strategic risk
Currency risk
Equity risk
5. The percentage change in earnings per share (EPS) that results from a given percentage change in sales is known as the _____.
degree of financial leverage
degree of operating leverage
degree of working capital leverage
degree of current asset leverage
degree of total leverage
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