Question 1

Corporations utilize external financing either because they do not have sufficient earnings to reinvest or they want to rebalance their capital structures.

Accepted Answer

Corporations may obtain external financing when they do not have adequate profits to reinvest or when they want to optimize their capital structure. Thus, the statement is true.

Question 2

Business risk refers to the relative dispersion of a firm's earnings before interest and taxes.

Accepted Answer

Business risk refers to the variability or uncertainty of a firm's earnings before interest and taxes, which is affected by factors such as competition, economic conditions, and company strategy.

Question 3

Companies that sell basic necessities face the highest levels of business risk because consumers will price shop aggressively for items they purchase on a regular basis.

Accepted Answer

Companies selling basic necessities often face lower levels of business risk because the demand for their products is relatively stable and inelastic, meaning consumers will continue to purchase these items regardless of price changes.

Question 4

Describe the sources of business risk.

Accepted Answer

The answer of Describe the sources of business risk....

Question 5

Sales of consumer durable goods,such as appliances,are more sensitive to swings in the business cycle,and therefore companies in these industries face a higher level of operating risk.

Accepted Answer

The answer of Sales of consumer durable goods,such as appliances,are...

Question 6

Business risk refers to the relative dispersion (variability)of a company's net income.

Accepted Answer

Business risk actually refers to the potential that a company will have lower than anticipated profits or experience a loss rather than making a profit, due to uncertainties in its environment, not just the variability of its net income.

Question 7

A high degree of variability in a firm's earnings before interest and taxes refers to
A) business risk.
B) financial risk.
C) financial leverage.
D) operating leverage.

Accepted Answer

Business risk refers to the variability in a firm's earnings before interest and taxes (EBIT) due to its operational environment. This includes factors like demand for the firm's products, input costs, and competition, which can all affect earnings independently of how the firm is financed.

Question 8

Variation in a company's income stream results from its choice of business line,its choice of an operating cost structure,and its choice of a capital structure.

Accepted Answer

A company's income stream can vary depending on the types of business lines it operates in, the level of operating costs it incurs, and the composition of its capital structure, which includes factors such as debt-to-equity ratios and interest rates. These choices can impact the amount and stability of a company's revenue and profits.

Question 9

Break-even analysis ignores fixed costs because fixed costs do not change.

Accepted Answer

Break-even analysis does take into account fixed costs because they are part of the total cost of production and impact the break-even point.

Question 10

Business risk refers to
A) the risk associated with financing a firm with debt.
B) the variability of a firm's expected earnings before interest and taxes.
C) the uncertainty associated with a firm's CAPM.
D) the variability of a firm's stock price.

Accepted Answer

Business risk refers to the variability of a firm's expected earnings before interest and taxes (EBIT). It is the risk associated with a company's operations and the uncertainty of its future earnings due to factors such as competition, changes in consumer demand, and changes in input prices.

Question 11

Break-even analysis is a short-term concept because,in the long run,all costs are variable.

Accepted Answer

In the long run, all costs become variable as firms can adjust all inputs, making break-even analysis more relevant for short-term decision-making where some costs are fixed.

Question 12

A key tool for evaluating business risk is break-even analysis.

Accepted Answer

The answer of A key tool for evaluating business risk...

Question 13

The break-even quantity of output is that quantity of output,in units,that results in an EBIT equal to zero.

Accepted Answer

The statement is true. The break-even point is the point at which total revenue equals total costs, resulting in zero profit or loss. At this point, the EBIT (earnings before interest and taxes) is also zero.

Question 14

Private equity funds tend to focus their investments in situations where promised returns are very high and the need for funds is brief.

Accepted Answer

Private equity funds typically invest in companies or projects with high growth potential and promise high returns on investment. They also tend to have a shorter investment horizon than other types of investors, often seeking to exit their investment within three to seven years.

Question 15

The four basic determinants of business risk include all of the following EXCEPT
A) the stability of the domestic economy.
B) the level of fixed cost used in the company's production process.
C) sensitivity to the business cycle.
D) competitive pressures in the firm's industry.

Accepted Answer

The level of fixed cost used in the company's production process is related to financial risk, not business risk. Business risk is more about external factors like economic stability, business cycle sensitivity, and competitive pressures.

Question 16

As production levels increase,fixed costs stay the same in total,but decrease on a per unit basis.

Accepted Answer

This is because fixed costs are spread across a larger number of units, resulting in a lower per unit cost.

Question 17

As the volume of production increases the variable cost-per unit of the product decreases.

Accepted Answer

Variable cost per unit remains constant regardless of the volume of production; it is the total variable cost that increases with the increase in production volume.

Question 18

The three major components responsible for variation in a company's income stream are business risk,operating risk,and financial risk.

Accepted Answer

Business risk refers to the risk of not being able to generate enough revenue to cover expenses, while operating risk refers to the risk of not being able to efficiently manage and produce goods or services. Financial risk refers to the risk of not being able to meet financial obligations such as debt payments. Together, these three components contribute to the overall variability of a company's income stream.

Question 19

What are the three determinants of the volatility of a firm's earnings?

Accepted Answer

The answer of What are the three determinants of the...

Question 20

Fixed costs are called indirect costs while variable costs are called direct costs.

Accepted Answer

The answer of Fixed costs are called indirect costs while...

Quiz 12: Determining the Financing Mix