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MAS - Capital Budgeting - Operating and Financial Leverage

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1. If I believe in the basic principle of a risk-reward relationship, my conclusion regarding security ratings and yields between an Aaa bond and a Baa bond would be that:

A. the Aaa bond would have the lower yield.  (CORRECT ANSWER)

                        B.  the Aaa bond would have the higher yield.
                        C. the Baa bond would have lower default risk.
D. default risks would differ but yields would be equal.
2. A firm's degree of operating leverage (DOL) depends primarily upon its
A. sales variability.

                        B. level of fixed operating costs.
                        C. closeness to its operating break-even point./(CORRECT ANSWER)
                        D. debt-to-equity ratio.
3. An EBIT-EPS indifference analysis chart is used for           
A. evaluating the effects of business risk on EPS.

                        B. examining EPS results for alternative financing plans at varying EBIT levels./ (CORRECT ANSWER)
                        C. determining the impact of a change in sales on EBIT.
D. showing the changes in EPS quality over time.
4. EBIT is usually the same thing as:
                         A. funds provided by operations.
                         B. earnings before taxes
                         C. net income
                         D. operating profit./(CORRECT ANSWER)
5. In the context of operating leverage break-even analysis, if selling price per unit rises and all other variables remain constant, the operating break-even point in units will:
                          A. fall./(CORRECT ANSWER)
  B. rise.

                          C. stay the same
                          D. still be indeterminate until interest and preferred dividends paid are known
 
 
 

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