Fundamentals of Financial Management mcq practice set 8

Q281. A higher degree of operating leverage indicates:
a) Higher fixed costs and lower variable costs
b) Lower fixed costs and higher variable costs
c) Lower operating risk and higher financial risk
d) Higher profitability and lower financial risk

Q282. Financial leverage can amplify:
a) Sales revenue
b) Operating income
c) Earnings per share
d) Market share

Q283. A company with a high financial leverage is more vulnerable to:
a) Changes in interest rates
b) Changes in sales volume
c) Changes in labor costs
d) Changes in product prices

Q284. The optimal capital structure of a company is the one that:
a) Maximizes financial leverage
b) Minimizes the cost of capital
c) Eliminates all forms of debt
d) Maximizes the market value of equity

Q285. The cost of capital represents the:
a) Average return earned on all investments
b) Average cost incurred in acquiring funds
c) Maximum return expected by shareholders
d) Minimum return required by creditors

Q286. When calculating the cost of equity using the dividend growth model, which of the following is required?
a) Dividend yield
b) Retention ratio
c) Risk-free rate of return
d) Dividend payout ratio

Q287. Which of the following factors affects the cost of debt?
a) Market conditions
b) Company’s profitability
c) Credit rating of the company
d) All of the above

Q288. In the computation of the cost of capital, floatation costs refer to:
a) The cost of issuing new debt
b) The cost of issuing new equity
c) The cost of borrowing from financial institutions
d) The cost of preferred stock issuance

Q289. The weighted average cost of capital (WACC) is used to evaluate:
a) Investment opportunities with positive net present value
b) Investment opportunities with negative net present value
c) The company’s liquidity position
d) The company’s profitability ratio

Q290. Market value weights may based on:
a) The historical cost of assets
b) The book value of equity and debt
c) The market value of equity and debt
d) The face value of preference shares

Q291. EBIT-EPS analysis helps in understanding the impact of changes in:
a) Earnings before interest and taxes (EBIT) on earnings per share (EPS)
b) Earnings per share (EPS) on earnings before interest and taxes (EBIT)
c) Earnings before interest and taxes (EBIT) on operating income
d) Earnings per share (EPS) on net income

Q292. Financial leverage is a measure of the:
a) Proportion of fixed costs in the company’s cost structure
b) Proportion of debt in the company’s capital structure
c) Company’s ability to meet its financial obligations
d) Company’s ability to generate profits

Q293. Combined leverage is the combination of:
a) Operating leverage and financial leverage
b) Fixed costs and variable costs
c) Debt and equity financing
d) Market value and book value weights

Q294. Which of the following factors affect the operating leverage of a company?
a) Proportion of fixed costs in the cost structure
b) Sales volume variability
c) Variable cost per unit
d) All of the above

Q295. The degree of financial leverage measures the:
a) Sensitivity of net income to changes in sales
b) Sensitivity of earnings per share (EPS) to changes in net income
c) Proportion of fixed costs in the company’s cost structure
d) Proportion of debt in the company’s capital structure

Q296. A higher degree of financial leverage implies:
a) Higher fixed costs and lower variable costs
b) Lower fixed costs and higher variable costs
c) Higher operating risk and lower financial risk
d) Higher profitability and lower financial risk

Q297. Financial risk refers to the:
a) Probability of bankruptcy faced by a company
b) Volatility of a company’s earnings
c) Sensitivity of a company’s stock price to market changes
d) Proportion of fixed costs in the company’s cost structure

Q298. Which of the following statements is true regarding the cost of capital?
a) The cost of capital is the same for all sources of funds.
b) The cost of capital represents the average rate of return on investments.
c) The cost of capital is used to evaluate short-term investment opportunities.
d) The cost of capital is influenced by the company’s capital structure.

Q299. The cost of debt is generally lower than the cost of equity because:
a) Debt is less risky for investors.
b) Debt is tax-deductible for the company.
c) Equity investors require higher returns.
d) Debt has lower floatation costs.

Q300. The cost of retained earnings is generally considered:
a) Lower than the cost of issuing new equity.
b) Higher than the cost of issuing new equity.
c) Equivalent to the cost of debt.
d) Irrelevant in the calculation of the cost of capital.

Study other MCQ Set of Fundamentals of Financial Management

• Fundamentals of Financial Management mcq practice set 1
• Fundamentals of Financial Management mcq practice set 2
• Fundamentals of Financial Management mcq practice set 3
• Fundamentals of Financial Management mcq practice set 4
• Fundamentals of Financial Management mcq practice set 5
• Fundamentals of Financial Management mcq practice set 6
• Fundamentals of Financial Management mcq practice set 7
• Fundamentals of Financial Management mcq practice set 8

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