Question 1: Taxes provide an incentive to take on debt because interest paid on debt is a deductible expense for tax purposes, shielding income from taxation.
A) True
B) False
Question 2: Firms have legal requirements to distribute funds to the owners in the form of cash dividends.
A) True
B) False
Question 3: The uncertainty associated with the earnings from operations:
A) Financing Risk
B) Operating Risk
C) Sales Risk
D) Business Risk
Question 4: The greater the ------- financing costs in the capital structure, the greater the leveraging effects on earnings to owners for a given change in operating earnings.
A) Operating
B) Variable
C) Fixed
D) Business
Question 5: If firms earnings are insufficient to meet interest payments on debt obligations, a firm can obtain the necessary funds by taking any of the following EXCEPT:
A) Issuing more shares of stock
B) Purchasing additional income-generating plant and equipment
C) Reducing assets by using working capital needed for operations or selling buildings or equipment
D) Taking on more debt obligations
Question 6: What is the breakeven level of output when a product sells for $32, has variable costs per unit of $14 and the firm's total fixed costs are $18,000?
A) 1,000 units
B) 1,285 units
C) 562 units
D) 391 Units
Question 7: Successful use of financial leverage can increase a firm's return on equity; however, a higher degree of financial leverage also increases the potential for loss.
A) True
B) False
Question 8: Financial distress is the condition where a company makes decisions under pressure to satisfy its legal obligations to its shareholders.
A) True
B) False
Question 9: A firm borrowed $600 of the $1,000 needed to begin operations. If net earnings are $25 for the first year of operation, what is the return on equity?
A) 4.17%
B) 1.56%
C) 2.50%
D) 6.25%
Question 10: A firm should consider these factors when determining its capital structure:
A) Taxes, risk, sales volume and competition
B) Type of asset, financial slack, fixed costs and risk
C) Taxes, risk, type of asset and financial slack
D) Risk, sales volume, fixed costs and financial slack