1) Operating leverage is measured as the responsiveness of the firm’s earnings before
interest and taxes relative to fluctuations in sales.
2) It is common practice among the largest corporations to sell their securities directly
to investors.
3) In Excel, the variable pvs stands for a bond’s par value.
4) An investor with a required return of 8% for stock A will purchase stock A if the
expected return for stock A is less than or equal to 8%.
5) A decrease in the level of production results in decreased fixed cost per unit.
6) Any project deemed acceptable using the discounted payback period will also be
acceptable if using the traditional payback period.
7) The optimal capital structure occurs when operating leverage equals financial
leverage.
8) According to the CAPM, systematic risk is the only relevant risk for capital
budgeting purposes.
9) If a company sells bonds and uses the proceeds to buy back common stock, the
company’s financial leverage with increase.
10) The higher the dividend payout ratio, the more a company must rely on external
financing.
11) Because of the overriding importance of cash flows to valuation, one basic tenet of
finance is that dividends increase the value of a company’s common stock.
12) Company unique risk can be virtually eliminated with a portfolio consisting of
approximately 20 securities.
13) Operating leverage is easier to control and manage than financial leverage because
operating leverage deals with the internal workings of the company while financing
deals with outside parties.
14) Each purchase occurring in the secondary markets increases the total stock of
financial assets that exist in the economy.
15) Under majority voting a majority (>50%) shareholder will be able to elect the entire
board of directors.
16) The cash budget can be used to provide an estimate of the firm’s future financing
needs.
17) The sole proprietorship is for all practical purposes the absence of any formal legal
business structure.