Exam 3 Practice Questions
1. The concept of operating leverage involves the use of __________ to magnify returns at
high levels of operation.
A. fixed costs
B. variable costs
C. marginal costs
D. semi-variable costs
2. Johnson Industries has an optimal capital structure that is 50% common equity, 40%
debt, and 10% preferred stock. Johnson's cost of common equity is 12%. Its cost of
preferred equity is 7%, and its pretax cost of debt is also 7%. The corporate tax rate is
35%. The weighted average cost of capital is closest to:
A. 7.0%
B. 7.5%
C. 8.0%
D. 8.5%
3. Stone Inc. is evaluating a project with an initial cost of $8,450. Cash inflows are
expected to be $1,000, $1,000 and $10,000 in the three years over which the project will
produce cash flows. If the discount rate is 13%, what is the net present value of the
project?
A. $95
B. $148
C. $236
D. $344
4. A firm has issued 10 percent preferred stock, which sold for $100 per share par value.
The cost of issuing and selling the stock was $2 per share. The firm's marginal tax rate is
40 percent. The cost of the preferred stock is:
A. 3.9 percent.
B. 6.1 percent.
C. 9.8 percent.
D. 10.2 percent.
5. The ________ is the rate of return a firm must earn on its investments in projects in
order to maintain the market value of its stock.
A. net present value
B cost of capital
C net profit margin
D gross profit margin
Exam 3 Practice Questions
6. ________ leverage is concerned with the relationship between earnings before interest
and taxes and earnings per share.
A.
B.
C.
D.
Financial
Operating
Variable
Total
7. If a firm has a break-even point of 20,000 units and the sales price per unit is $10 per
unit, variable cost is $4 per unit and fixed costs are $120,000 total, what will the firm’s
operating profit be if sales increase to 60,000 units sold?
A.
B.
C.
D.
$100,000
$240,000
$175,000
$300,000
8. If EBIT equals $300,000 and interest equals $50,000, what is the degree of financial
leverage for the firm?
A.
B.
C.
D.
2.40x
4.25x
3.75x
1.20x
Exam 3 Practice Questions
Answers:
1. A
2. D
3. B
4. D
5. B
6. A
7. B
8. D