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    Business and Financial Risk Answer: D Diff: E

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    Kaye Javellana
    The document discusses business and financial risk and optimal capital structure. It contains 7 multiple choice questions with answers and difficulty ratings. The questions ask about factors that affect business risk, benefits of being at a target capital structure, definitions of optimal capital structure, and identifying the optimal capital structure based on given financial metrics.

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    Business and Financial Risk Answer: D Diff: E

    Uploaded by

    Kaye Javellana
    81 views1 page
    The document discusses business and financial risk and optimal capital structure. It contains 7 multiple choice questions with answers and difficulty ratings. The questions ask about factors that affect business risk, benefits of being at a target capital structure, definitions of optimal capital structure, and identifying the optimal capital structure based on given financial metrics.

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    C13-2

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    The document discusses business and financial risk and optimal capital structure. It contains 7 multiple choice questions with answers and difficulty ratings. The questions ask about factors that affect business risk, benefits of being at a target capital structure, definitions of optimal capital structure, and identifying the optimal capital structure based on given financial metrics.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    81 views1 page

    Business and Financial Risk Answer: D Diff: E

    Uploaded by

    Kaye Javellana
    The document discusses business and financial risk and optimal capital structure. It contains 7 multiple choice questions with answers and difficulty ratings. The questions ask about factors that affect business risk, benefits of being at a target capital structure, definitions of optimal capital structure, and identifying the optimal capital structure based on given financial metrics.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 1

    Business and financial risk Answer: d Diff: E

    4. Which of the following statements is most correct?

    a. A firm’s business risk is solely determined by the financial


    characteristics of its industry.
    b. The factors that affect a firm’s business risk are determined partly by
    industry characteristics and partly by economic conditions.
    Unfortunately, these and other factors that affect a firm’s business
    risk are not subject to any degree of managerial control.
    c. One of the benefits to a firm of being at or near its target capital
    structure is that financial flexibility becomes much less important.
    d. The firm’s financial risk may have both market risk and diversifiable
    risk components.
    e. None of the statements above is correct.

    Optimal capital structure Answer: e Diff: E


    5. Which of the following statements is most correct?

    a. As a rule, the optimal capital structure is found by determining the


    debt-equity mix that maximizes expected EPS.
    b. The optimal capital structure simultaneously maximizes EPS and
    minimizes the WACC.
    c. The optimal capital structure minimizes the cost of equity, which is a
    necessary condition for maximizing the stock price.
    d. The optimal capital structure simultaneously minimizes the cost of
    debt, the cost of equity, and the WACC.
    e. None of the statements above is correct.

    Optimal capital structure Answer: c Diff: E


    6. From the information below, select the optimal capital structure for Minnow
    Entertainment Company.

    a. Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.


    b. Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.
    c. Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.
    d. Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.
    e. Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.

    Optimal capital structure Answer: e Diff: E


    7. Which of the following statements best describes the optimal capital
    structure?

    a. The optimal capital structure is the mix of debt, equity, and preferred
    stock that maximizes the company’s earnings per share (EPS).
    b. The optimal capital structure is the mix of debt, equity, and preferred
    stock that maximizes the company’s stock price.
    c. The optimal capital structure is the mix of debt, equity, and preferred
    stock that minimizes the company’s weighted average cost of capital
    (WACC).
    d. Statements a and b are correct.
    e. Statements b and c are correct.

    Chapter 13 - Page 2

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