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Chapter 11 Notes

1. Which of the following variables will be at their highest expected level under
a worst case scenario
a. Fixed cost, variable cost
2. Sensitivity analysis is based on?
a. Varying a single variable and measuring the resulting change in the
NPV of a project
3. Which of the following are inversely related to variable cost per unit?
a. Contribution margin per unit, operating cash flow per unit, net profit
per unit
4. Which of the following values will be equal to zero when a firm is producing
the accounting break-even level of output?
a. Internal rate of return, net income
5. None
a. Is operating at a higher level than if it was operating at its cash breakeven level
6. Given the following, which feature identifies the most desirable level of
output for a project?
a. Discounted payback period equal to the projects life
7. A project that has a payback period that is exactly equals the projects life.
The project is operating at?
a. Accounting break-even point
8. Which of the following characteristics relate to the cash break-even point for
a given project?
a. The project never pays, the NPV is negative and equal to the initial
cash outlay
9. Which one of the following represents the level of output where a project
produces a rate of return just equal to its requirement?
a. Financial break-even
10.Which of the following statements are identified with financial break-even
a. The present value of the cash inflows exactly offsets the initial cash
flow, the NPV is zero, The discounted payback period equals the life of
the project
11.To determine that sales level you should compute the?
a. Financial break-even point

12.You are considering a project that you believe is quite risky. To reduce any
potentially harmful results from accepting this project, you could?
a. Lower the degree of operating leverage
13.Which one of the following characteristics best describes a project that has a
low degree of operating leverage?
a. High variable costs relative to the fixed costs

Chapter 14 Notes
1. Scholastic toys is considering developing and distributing a new board game
for children.
a. By using the capital asset pricing model
2. A firms overall cost of equity is
a. Highly dependent upon the growth rate and risk level of the firm
3. The cost of equity for a firm
a. Ignores the firms risks when that cost is based on the dividend growth
4. The aftertax cost of debt generally increases when
a. The market rate of interest increases and tax rate decrease
5. The cost of preferred stock
a. Is equal to the dividend yield
6. The aftertax cost of debt
a. Has a greater effect on a firms cost of capital when the debt-equity
ratio increases
7. Which one of the following statements is correct for a firm that uses debt in
its capital structure?
a. The WACC should decrease as the firms debt-equity ratio increases
8. The subjective approach to project analysis
a. Assigns discount rates to projects based on the discretion of the senior
managers of a firm
9. Flotation costs for a levered firm should
a. Be weighted and included in the initial cash flow

Chapter 16 Notes
1. The value of a firm is maximized when the
a. Weighted average cost of capital is minimized
2. The optimal capital structure has been achieved when the
a. Debt-equity ratio results in the lowest possible weighted average cost
of capital
3. You have computed the break-even point between a levered and an
unlevered capital structure. Assume there are no taxes. At the break-even
level, the:
a. Firm is just earning enough to pay for the cost of the debt

4. Which one of the following statements is correct concerning the relationship

between a levered and an unlevered capital structure? Assume there are no
a. At the break-even point, there is no advantage to debt
5. Which of the following statements related to financial risk are correct
a. Financial risk is the risk associated with the use of debt financing, as
financial risk increases so too does the cost of equity, financial risk is
wholly dependent upon the financial policy of a firm
6. The interest tax shield is a key reason why
a. The net cost of debt to a firm is generally less than the cost of equity
7. If a firm has the optimal amount of debt, then the
a. Value of the levered firm will exceed the value of the firm if it were
8. The capital structure that maximizes the value of a firm also
a. Minimizes the cost of capital
9. The optimal capital structure
a. Will vary over time as taxes and market conditions change
10.The static theory of capital structure advocates that the optimal capital
structure for a firm
a. Equates the tax savings from an additional dollar of debt to the
increased bankruptcy costs related to that additional dollar of debt
11.Which of the following are correct according to pecking-order theory
a. Firms stockpile internally-generated cash, there is an inverse
relationship between a firms profit level and its debt level, a firms
capital structure is dictated by its need for external financing