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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