finance exam 2

7/25/2019 Finance Exam 2

1/34

Practice Questions for Finance 3000, Exam II, Fall 2009

Chapter 3

1. Ratios are used to compare different firms in the same industry.TRUE

2. Financial ratios are used to weigh and evaluate the operational performance of the firm.TRUE

3. Liquidity ratios indicate how fast a firm can generate cash to pay bills.TRUE

4. ban!er or trade creditor is most concerned about a firm"s profitability ratios.F!"E

#. Ratios are only useful for those areas of business that involve investment decisions.F!"E

$. %ebt utili&ation ratios are used to evaluate the firm"s debt position with regard to its assetbase and earning power.TRUE

'. (he %u)ont system of analysis emphasi&es that profit generated by assets can be derivedby various combinations of profit margins and asset turnover.TRUE

*. %uring disinflation+ stoc! prices tend to go up because the investor"s required rate of returngoes down.TRUE

,. nalysts agree that e-traordinary gainslosses should be e-cluded from ratio analysisbecause they are one time events+ and do not measure annual operating performance.TRUE

1/. 0ntangible assets are becoming an important part of the assets in a company"s financialstatements because accountants are recogni&ing the growing impact of brand names.F!"E

11. bsolute values ta!en from financial statements are more useful than relative values.F!"E

)age #of 3$


2/34

12. Ratio analysis can be useful for.historical trend analysis within a firm..comparison of ratios within a single industry..measuring the effects of financing.%&ll of these are true.

13. 0n e-amining the liquidity ratios+ the primary emphasis is the firm"s.ability to effectively employ its resources..overall debt position.C&ability to pay shortterm obligations on time.%.ability to earn an adequate return.

14. hich of the following is not an asset utili&ation ratio5.0nventory turnover'&Return on assets.Fi-ed asset turnover%.verage collection period

1#. shortterm creditor would be most interested in.profitability ratios..asset utili&ation ratios.C&liquidity ratios.%.debt utili&ation ratios.

1$. hich of the following is not considered to be a profitability ratio5.profit margin'&times interest earned.return on equity

%.return on assets 6investment7

1'. hich two ratios are used in the %u)ont system to create return on assets5.Return on assets and asset turnover'&)rofit margin and asset turnover.Return on total capital and the profit margin%.0nventory turnover and return on fi-ed assets

1*. (he ubba orp. had earnings before ta-es of 82//+/// and sales of 82+///+///. 0f it is inthe #/9 ta- brac!et its afterta- profit margin is:

.129.2/9%.2#9

)age 2of 3$


3/34

1,. firm has a debt to equity ratio of #/9+ debt of 83//+///+ and net income of 8,/+///.(he return on equity is.$/9'&1#9.3/9

%.not enough information2/. firm has a debt to asset ratio of '#9+ 824/+/// in debt+ and net income of 84*+///.alculate return on equity.&$/9.2/9.2$9%.not enough information

21. For a given level of profitability as measured by profit margin+ the firm"s return on equitywill.increase as its debttoassets ratio decreases.

.decrease as its current ratio increases.C&increase as its debtto assets ratio increases.%.decrease as its timesinterestearned ratio decreases.

22. o. has an average collection period of $/ days. (otal credit sales for the year were83+///+///. hat is the balance in accounts receivable at yearend5.8#/+///.81//+///C&8#//+///%.8*/+///

23. sset utili&ation ratios&relate balance sheet assets to income statement sales..measure how much cash is available for reinvestment into current assets..are most important to stoc!holders.%.measures the firm"s ability to generate a profit on sales.

24. ;


4/34

2#. decreasing average collection period could be associated with 6select the one bestanswer7.increasing sales..decreasing sales..decreasing account receivable.%&a and c.

2$. 0f accounts receivable stays the same+ and credit sales go up.the average collection period will go up.'&the average collection period will go down..accounts receivable turnover will decrease.%. and .

2'. (otal asset turnover indicates the firm"s.liquidity..debt position.C&ability to use its assets to generate sales.%.profitability.

2*. firm has current assets of 8'#+/// and total assets of 83'#+///. (he firm"s sales are8,//+///. (he firm"s fi-ed asset turnover is&3./-.12./-.2.4-%.#./-

2,. quic! ratio that is much smaller than the current ratio reflects.a small portion of current assets is in inventory.'&a large portion of current assets is in inventory..that the firm will have a high inventory turnover.%.that the firm will have a high return on assets.

3/. firm"s long term assets > 8'#+///+ total assets > 82//+///+ inventory > 82#+/// andcurrent liabilities > 8#/+///..current ratio > /.#? quic! ratio > 1.#.current ratio > 1./? quic! ratio > 2./

.current ratio > 1.#? quic! ratio > 2./%&current ratio > 2.#? quic! ratio > 2./

)age $of 3$


5/34

31. 0nvestors and financial analysts wanting to evaluate the operating efficiency of a firm"smanagers would probably loo! primarily at the firm"s.debt utili&ation ratios..liquidity ratios.

C&asset utili&ation ratios.%.profitability ratios.

32. n increasing average collection period indicates.the firm is generating more income..accounts receivable are going down..the company is becoming more efficient in its collection policy.%&the company is becoming less efficient in its collection policy.

33. 0n addition to comparison with industry ratios+ it is also helpful to analy&e ratios using.trend analysis.

.historical comparisons..neither? only industry ratios provide valid comparisons.%&both a and b.

34. 0f a firm has both interest e-pense and lease payments+.times interest earned will be smaller than fi-ed charge coverage.'&times interest earned will be greater than fi-ed charge coverage..times interest earned will be the same as fi-ed charge coverage.%.fi-ed charge coverage cannot be computed.

3#. firm has operating profit of 812/+/// after deducting lease payments of 82/+///.

0nterest e-pense is 84/+///. hat is the firm"s fi-ed charge coverage5.$.//-'&2.33-.2.//-%.3.//-

3$. firm has total assets of 82+///+///. 0t has 8,//+/// in longterm debt. (he stoc!holdersequity is 8,//+///. hat is the total debt to asset ratio5.4#9.4/9C#9%.none of these

3'. (he higher a firm"s debt utili&ation ratios+ e-cluding debttototal assets+ the&less ris!y the firm"s financial position..more ris!y the firm"s financial position..more easily the firm will be able to pay dividends.%.none of these.

)age (of 3$


6/34

3*. 0f lease payments are reduced:.times interest earned goes up.'&fi-ed charges coverage goes up..fi-ed charge coverage stays the same.%.fi-ed charge coverage goes down.

3,. 0ndustries most sensitive to inflationinduced profits are those with.seasonal products.'&cyclical products..consumer products.%.highprofit products.

4/. Replacement cost accounting 6current cost method7 will usually&increase assets+ decrease net income before ta-es+ and lower the return on equity..increase assets+ increase net income before ta-es+ and increase the return on equity..decrease assets+ increase net income before ta-es+ and increase the return on equity.%.@one of these apply.

41. %uring inflation+ replacement cost accounting will.increase the value of assets..lower the debt to asset ratio..reduce incomes.%&all of these.

42. 0ncome can be distorted by factors other than inflation. (he most important causes ofdistortion for interindustry comparisons are:.timing of revenue receipts and nonrecurring gains or losses..ta- writeoff policy and use of different inventory methods.

C&ll of these.%.@one of these.

43. %isinflation may cause.an increase in the value of gold+ silver+ and gems.'&a reduced required return demanded by investors on financial assets..additional profits through falling inventory costs.%.@one of these.

44. %isinflation as compared to inflation would normally be good for investments in&bonds.

.gold..collectible antiques.%.te-t boo!s.

)age )of 3$


7/34

4#. company e-periencing rapid price increases for its products would ta!e the mostconservative approach by using.F0FA accounting.'&L0FA accounting..average cost accounting.

%.a or c.

4$. (he BBBBBBBBBBBBBB method of inventory costing is least li!ely to lead to inflationinduced profits..F0FA'&L0FA.eighted average%.Lower of cost or mar!et

4'. large e-traordinary loss has what effect on cost of goods sold5.raises it.lowers itC&has no effect%.need more information

4*. hich of the following is a potential problem of utili&ing ratio analysis5.trends and industry averages are historical in nature..financial data may be distorted due to pricelevel changes..firms within an industry may not use similar accounting methods.%&all of these.

4,. 0f government bonds pay *.#9 interest and insured savings accounts pay #.#9 interest+stoc!holders in a moderately ris!y firm would e-pect returnonequity values of

.#.#9.$.#9.129%&above *.#9+ but the e-act amount is uncertain.

#/. (he most rigorous test of a firm"s ability to pay its shortterm obligations is its.current ratio.'&quic! ratio..debttoassets ratio.%.timesinterestearned ratio.

#1. 0f the company"s accounts receivable turnover is increasing+ the average collection period:.is going up slightly'&is going down.could be moving in either direction%.is going up by a significant amount

)age *of 3$


8/34

#2. Cistorical cost based depreciation tends to BBBBBBBBB when there is inflation..lower ta-es.decrease profitsC&increase profits%.increase assets

)age +of 3$


9/34

#3. Refer to the figure above. Dsing the %u)ont method+ return on assets 6investment7 forEegaframe omputer is appro-imately.1#9'&2#9.2,9

%.3#9

#4. Refer to the figure above. ompute Eegaframe"s after ta- profit margin..1/./9'&14./9.1#.49%.2/./9

##. Refer to the figure above. (he firm"s return on equity is.#2.*9.##.$9

C$./9%.1//./9

#$. Refer to the figure above. (he firm"s average collection period is&3/ days..2# days..14.4 days.%.2/ days.

#'. Refer to the figure above. (he firm"s receivable turnover is.4.4-

.1/-C&12-%.14.4-

#*. Refer to the figure above. Eegaframe"s quic! ratio is.2:1'&1:1.1.$:1%.1/:1

#,. Refer to the figure above. Eegaframe"s current ratio is&1.,:1

.1.$2#:1.1.#:1%.3.2:1

)age 9of 3$


10/34

$/. Refer to the figure above. hat is Eegaframe omputer"s total asset turnover5.4.#/-.3.$-.2-%&1.'$-

$1. Refer to the figure above. (he firm"s debt to asset ratio is$.19.4'.229.33.339%.none of these

$2. Refer to the figure above. (imes interest earned for Eegaframe omputer is.4.#-.,-.11-%&1/-

)age #0of 3$


11/34

)age ##of 3$


12/34

$3. Refer to the figure above. ompute (ew"s after ta- profit margin..$#./9'&2'.39.#,.49%.@one of these.

$4. Refer to the figure above. Dsing the %u)ont method+ return on assets 6investment7 for(ew is appro-imately.12#9'&34.19.2,3./9%.@one of these.

$#. Refer to the figure above. (he firm"s return on equity is.13$.#9.13#.2,9C&*/.2,9%.#'.#9

$$. Refer to the figure above. (he firm"s receivable turnover is.#./-.1.'-C&$.2#-%./.2-

$'. Refer to the figure above. (he firm"s average collection period is'.$ days..222 days.

.##.$ days.%.$.3 days.

$*. Refer to the figure above. (he firm"s inventory turnover ratio is&1/-..*-..2.'-.%./.1-.

$,. Refer to the figure above. (he firm"s fi-ed asset turnover ratio is&2./-.

.1.$-../.#-.%.1.3-.

)age #2of 3$


13/34

'/. Refer to the figure above. hat is (ew"s total asset turnover5.2.,-.1.3-.1./-%&1.2#-

'1. Refer to the figure above. (ew"s quic! ratio is.1.#:1'&1:1.2:1%.none of these

'2. Refer to the figure above. (ew"s current ratio is&1.#:1.1:1.2:1

%.none of these

'3. Refer to the figure above. (he firm"s debt to asset ratio is*9..339..2#9.%.4*9.

'4. Refer to the figure above. (imes interest earned for (ew ompany is.$.*-.1/.#-.2#-%&11.#-

'#. Refer to the figure above. Fi-ed harge coverage for (ew ompany is.23-.13.$-.1.3-%&*./-

)age #3of 3$


14/34

)age #$of 3$


15/34

'$. Refer to the figure above. ompute Earni"s after ta- profit margin..'.#9'&3.'#9.#/9%.@one of these.

''. Refer to the figure above. Dsing the %u)ont method+ return on assets 6investment7 forEarni is appro-imately.2//9'&'.#9.3.'#9%.@one of these.

'*. Refer to the figure above. (he firm"s return on equity is.'#9.2$.*9

C&13.49%.1#9

',. Refer to the figure above. (he firm"s receivable turnover is.1/-.*-C&2/-%.12-

*/. Refer to the figure above. (he firm"s average collection period is&1* days..2'' days..13, days.%.2/ days.

*1. Refer to the figure above. (he firm"s inventory turnover ratio is&1/-..#-../.4-.%./.1-.

*2. Refer to the figure above. (he firm"s fi-ed asset turnover ratio is

&3.1-..1.#-..2-.%./.1-.

)age #(of 3$


16/34

*3. Refer to the figure above. hat is Earni"s total asset turnover5.13.3-.4-

.1-%&2-

*4. Refer to the figure above. Earni"s quic! ratio is&/.',:1./.#/:1.1.*4:1%.none of these

*#. Refer to the figure above. Earni"s current ratio is./.',:1./.#:1C&1.*4:1%.none of these

*$. Refer to the figure above. (he firm"s debt to asset ratio is&449..339..1,9.%.349.

*'. Refer to the figure above. (imes interest earned for Earni ompany is.3-

.#-.*/-%&$-

**. Refer to the figure above. Fi-ed harge coverage for Earni ompany is.1#-.'.#-./.,-%&4.$-

*,. 0f Randolph o. has sales of 82+///+///+ net income of 812/+///+ and total asset turnoverof 2-+ what is their RA5.339.1'9C&129%.$9

)age #)of 3$


17/34

,/. 0f a-ter Dnlimited has annual sales of 8#+///+/// 6*/9 on credit7+ and receivables equalto 3#9 of credit sales+ what is their receivables turnover5.3.$ times'&2., times.2.3 times%.4.2 times

,1. 0f rossroads 0nternational has 83+///+/// in total sales 6'#9 on credit7 and receivablesof 8#//+///+ what is their average collection period5&*/ days.$/ days.$1 days%.*1 days

,2. ll of the following are common e-amples of possible distortion in reported incomee-cept.inflation.treatment of nonrecurring itemsC&cash flow statements%.reporting of revenue

,3. (rend and industry analysis provide all of the following information e-cept.benchmar!ing.the progress of the company.basis for decisionma!ing about capital structure%&future information about the company

,4. 0f (urnpoint 0nc. has net income of 83//+///+ assets of 83+///+///+ sales of 82+///+///+and debt of 1+3//+///+ what is their RA5&between 1'1*9.between 1,2/9.between 21229%.none of these

)age #*of 3$


18/34

,#. omplete the following balance sheet for the Range ompany using the followinginformation:%ebt to ssets > $/ percentGuic! Ratio > 1.1sset (urnover > #-Fi-ed sset (urnover > 12./3'-urrent Ratio > 2verage ollection )eriod > 1$.*3' days

ssume all sales are on credit and a 3$/day year.

)age #+of 3$


19/34

)age #9of 3$


20/34

,$. Follies oo!store+ the only boo!store close to campus+ had net income in 2//# of8,/+///. Cere are some of the financial ratios from the annual report.

Dsing these ratios+ calculate the following for Follies oo!store:a7 Halesb7 (otal assetsc7 (otal asset turnoverd7 (otal debte7 Htoc!holders" equityf7 Return on equity

)age 20of 3$


21/34

)age 2#of 3$


22/34

Chapter (

,'. Leverage is the use of fi-ed costs to magnify returns at high levels of operation.TRUE

,*. Leverage wor!s best when volume is increasing.TRUE

,,. Aperating leverage emphasi&es the impact of using fi-ed assets in the business.TRUE

1//. Financial leverage emphasi&es the impact of using debt in the business.TRUE

1/1. Hales commissions and raw material are variable costs.TRUE

1/2. (he contribution margin is equal to price per unit minus total costs per unit.F!"E

1/3. s the contribution margin rises+ the brea!even point goes down.TRUE

1/4. Linear brea!even analysis assumes that costs are linear functions of volume.TRUE

1/#. Linear brea!even analysis and operating leverage are only valid within a relevant range

of production.TRUE

1/$. Financial leverage primarily affects the lefthand side of the balance sheet.F!"E

1/'. Aperating leverage primarily affects the left hand side of the balance sheet whilefinancial leverage affects the right hand side of the balance sheet.TRUE

1/*. (he degree of financial leverage measures the percentage change in )H for every 1

percent move in 0(.TRUE

1/,. Aperating leverage influences the bottom half of the income statement while financialleverage deals with the top half.F!"E

)age 22of 3$


23/34

11/. Firms with cyclical sales should employ a high degree of leverage.F!"E

111. (he interwoven boundaries of ban!s and different trading companies in Iapan ma!e iteasier to acquire credit in Iapan than in the D.H.

TRUE

112. n e-ample of an adJustment for a cash brea!even analysis would be adding bac!increases in accounts receivable.F!"E

113. %egree of combined leverage considers the impact of a change in volume on the changein operating income.F!"E

114. (he concept of operating leverage involves the use of BBBBBBBBBB to magnify returns athigh levels of operation.

&fi-ed costs.variable costs.marginal costs%.semivariable costs

11#. hich of the following questions does brea!even analysis attempt to address5.Cow much do changes in volume effect costs and profits5.t what point does the firm brea! even5.hat is the most efficient level of fi-ed assets to employ5%&ll of these

11$. 0n brea!even analysis+ the contribution margin is defined as&price minus variable cost..price minus fi-ed cost..variable cost minus fi-ed cost.%.fi-ed cost minus variable cost.

11'. t the brea!even point+ a firm"s profits are.greater than &ero..less than &ero.C&equal to &ero.%.@ot enough information to tell

11*. 0f a firm has a brea!even point of 2/+/// units and the contribution margin on the firm"ssingle product is 83.// per unit and fi-ed costs are 8$/+///+ what will the firm"s net income beat sales of 3/+/// units5.8,/+///'&83/+///.81#+///%.84#+///

)age 23of 3$


24/34

11,. 0f sales volume e-ceeds the brea!even point+ the firm will e-perience.an operating loss.'&an operating profit..an increase in plant and equipment.

%.an increase in stoc! price.

12/. (he brea!even point can be calculated as.variable costs divided by contribution margin..total costs divided by contribution margin..variable cost times contribution margin.%&fi-ed cost divided by contribution margin.

121. highly automated plant would generally have.more variable than fi-ed costs.'&more fi-ed than variable costs..all fi-ed costs.%.all variable costs.

122. 0f fi-ed costs rise while other variables stay constant.the brea!even point rises..degree of operating leverage increases..total profit declines.%&all of these

123. 0f the price per unit decreases because of competition but the cost structure remains the

same&the brea!even point rises..the degree of combined leverage declines..the degree of financial leverage declines.%.ll of these

124. 0f a firm has fi-ed costs of 83/+///+ a price of 84.//+ and a brea!even point of 1#+///units+ the variable cost per unit is:.8#.//'&82.//

.8.#/%.84.//

)age 2$of 3$


25/34

12#. 0f a firm has fi-ed costs of 82/+///+ variable cost per unit of 8.#/+ and a brea!even pointof #+/// units+ the price is:.82.#/

.8#.//.84.//%&84.#/

12$. 0f a firm has a price of 84.//+ variable cost per unit of 82.#/ and a brea!even point of2/+/// units+ fi-ed costs are equal to:.813+333.81/+///C&83/+///%.8#/+///

12'. firm with 8#/+/// in fi-ed costs brea!s even on unit sales of 1/+///+ how many unitsmust the firm sell to earn 82/+/// in operating profits5.12+/// units'&14+/// units.1$+/// units%.(here is not enough information to determine the unit sales required.

12*. firm has operating profits of 81/+/// on unit sales of #+/// units. Fi-ed costs are83/+///. hat is the firm"s brea!even sales level5&less than 4/// units..4/// units..more than 4/// units%.(here is not enough information to determine the unit brea!even point.

12,. firm"s brea!even point will rise if.fi-ed costs decrease.contribution margins increase.price per unit rises%&variable cost per unit rises

13/. %avison (oaster orp. sells its products for 81// per unit. 0t has the following costs:

(he brea!even point is.less than 2#// units.2#// unitsC&more than 2#// units%.not enough information has been provided to determine the brea!even point.

)age 2(of 3$


26/34

131. hich of the following is true about the concept of leverage5.at the brea!even point+ operating leverage is equal to &ero..combined leverage measures the impact of operating and financial leverage on 0(..financial leverage measures the impact of fi-ed costs on earnings.%&none of these

132. wea!ness of brea!even analysis is that it assumes:&revenue and costs are a linear 6constant7 function of volume..prices and costs increase when the economy is strong and confidence is high..cost of goods sold goes up as revenue increases.%.there is no wea!ness.

133. high %AL means:.there are high labor costs..there is high debt..there is a large amount of equity.

%&there are high fi-ed costs.

134. hich of the following is concerned with the change in operating profit as a result of achange in volume5.Financial leverage.rea!even pointC&Aperating leverage%.ombined leverage

13#. ash brea!even analysis&is helpful in analy&ing the shortterm outloo! of the firm+ particularly when it is in trouble

financially..is important when analy&ing longterm profitability..includes depreciation e-pense as a fi-ed cost when calculating the degree of financialleverage.%.@one of these.

13$. (he degree of operating leverage may be defined as.the percent change in operating income divided by the percent change in unit volume..G 6)K7 divided by G 6)K7 F..H (K divided by H (K F.%&all of these

13'. Loretta @ieces fi-ed costs are 82//+///+ including 82/+/// of depreciation e-pense.(he price of each unit sold is 812+ and the variable cost per unit is 8$. Cow many units mustthe firm sell to reach the cash brea!even point5&less than 33+333 units.33+333 units.Eore than 33+333 units%.not enough information has been provided to determine the cash brea!even point

)age 2)of 3$


27/34


28/34

14#. 0f 0( equals 81$/+/// and interest equals 83/+///+ what is the degree of financialleverage5.#.33-'&1.23-

..*12#-%.4.33-

14$. (he degree of financial leverage is concerned with the relation between.changes in volume and changes in )H..changes in volume and changes in 0(.C&changes in 0( and changes in )H.%.changes in 0( and changes in operating income.

14'. hen a firm employs no debt&it has a financial leverage of one..it has a financial leverage of &ero.

.its operating leverage is equal to its financial leverage.%.it will not be profitable.

14*. 0f a firm has the lowest possible degree of operating leverage and the lowest possibledegree of financial leverage+ then.%AL equals 1+ and %FL equals /..%AL equals /+ and %FL equals 1.C&%AL equals 1+ and %FL equals 1.%.none of these

14,. ombined leverage is concerned with the relationship between

.changes in 0( and changes in )H.'&changes in volume and changes in )H..changes in volume and changes in 0(.%.changes in 0( and changes in net income.

1#/. hich of the following is not true about leverage5.operating leverage influences the top half of the income statement+ determining 0(..financial leverage deals with the bottom half of the income statement+ determining )HC&combined leverage utili&es the entire income statement+ showing the impact of change involume on 0(.%.none of these

1#1. 0f the business cycle were Just beginning its upswing+ which firm would you anticipatewould be li!ely to show the best growth in )H over the ne-t year5 Firm has high combinedleverage and Firm has low combined leverage.&Firm .Firm .0ndifferent between the two%.0t depends on how much financial leverage each firm has.

)age 2+of 3$


29/34

1#2. Refer to the figure above. (he %egree of Aperating Leverage is.1.43-'&1.#$-.3.33-%.2.22-

1#3. Refer to the figure above. (he %egree of Financial Leverage is&1.2,-.4.#/-.3.#/-%.1.32-

1#4. Refer to the figure above. (he %egree of ombined Leverage is.2.2-.1.,-.2.,-%&2./-

1##. Refer to the figure above. (his firm"s brea!even point is.4+*// units'&14+$34 units.'+142 units%.1*+/// units

)age 29of 3$


30/34

1#$. Refer to the figure above. (he %egree of Aperating Leverage 6%AL7 is.1.#*-'&1.,#-.3.#/-%.1.4/-

1#'. Refer to the figure above. (he %egree of Financial Leverage 6%FL7 is&3.#/-.1.4/-.1.,#-%.1.#*-

1#*. Refer to the figure above. (he %egree of ombined Leverage 6%..L.7 is.3./*-.#.4#-.2.'3-

%&$.*3-

1#,. Ceavy use of longterm debt may be beneficial in an inflationary economy because.the debt may be repaid in more Me-pensiveM dollars..nominal interest rates e-ceed real interest rates..inflation is associated with the pea! of a business cycle.%&the debt may be repaid in McheaperM dollars.

1$/. Dnder which of the following conditions could the overuse of financial leverage bedetrimental to the firm5.Htable industry

'&yclical demand for the firm"s products..Dpswing of business cycle.%.Low interest cost compared to return on assets

1$1. Firm produces semiconductors using highly technical machinery? Firm is a retailclothing store. onsider which firm employs a higher degree of operating leverage and thenanswer the following question: Mhich of the following comparative statements about firms and is true5M. has a lower brea!even point than + but "s profit grows faster after the brea!even.. has a higher brea!even point than + but "s profit grows slower after the brea!even.C& has a lower brea!even point than + but "s profit grows faster after brea!even.%. has a lower brea!even point than + and profit grows at the same rate for bothcompanies after the brea!even point.

1$2. factory which relies on highly technical machinery+ may choose to reduce their overallleverage position by.selling their machinery.increasing their accounts receivableC&utili&ing a higher level of equity%.decreasing their variable costs per unit

)age 30of 3$


31/34

1$3. 0f (echor has fi-ed costs of 8*/+///+ variable costs of 81.2/unit+ sales priceunit of 8$+and depreciation e-pense of 82#+///+ what is their cash brea!even in units5.,+1$''&11+4#*

.21+*'#%.4#+*33

1$4. Nreen o. has total assets 8##/+///+ a cost of borrowed funds of '9+ and an 0( of841+2#/. From a financial brea!even perspective+ Nreen o. is.brea!ing even.lower than the brea! evenC&higher than the brea!even%.in need of new financing

1$#. From the following income statement+ calculate:

a7 %egree of financial leverage.b7 %egree of operating leverage.c7 %egree of combined leverage.

)age 3#of 3$


32/34


33/34

1$'. new restaurant is ready to open for business. 0t is estimated that the food cost 6variablecost7 will be 4/9 of sales+ while fi-ed cost will be 84#/+///. (he first year"s sales estimatesare 81+2#/+///. (he cost to start up this restaurant will be 82+///+///. (wo financingalternatives are being considered: a7 #/9 equity financing and #/9 debt at 129+ or b7 allequity financing. ommon stoc! can be sold at 8# per share.

a7 ompute the Aperating rea!even point in dollars.b7 ompute %AL.c7 ompute %FL and %L for both financingplans.

)age 33of 3$


34/34

finance exam 2

Documents