1. Business risk is concerned with the operations of the firm. Which of the following is not associated with (or not a part of) business risk?

a. Demand variability.

b. Sales price variability.

c. The extent to which operating costs are fixed.

d. Changes in required returns due to financing decisions.

e. The ability to change prices as costs change.

2. From the information below, select the optimal capital structure for Minnow Entertainment Company.

a. Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.

b. Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.

c. Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.

d. Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.40.

e. Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.00.

3. The firm's target capital structure is consistent with which of the following?

a. Maximum earnings per share (EPS).

b. Minimum cost of debt (kd).

c. Minimum risk.

d. Minimum cost of equity (ks).

e. Minimum weighted average cost of capital (WACC).

4. Which of the following events is likely to encourage a corporation to increase its debt ratio?

a. An increase in the corporate tax rate.

b. An increase in the personal tax rate.

c. An increase in the company's degree of operating leverage.

d. An increase in the expected cost of bankruptcy.

e. Increased uncertainty about the level of sales and output prices.

5. Which of the following is a key determinant of operating leverage?

a. Level of debt.

b. Physical location of production facilities.

c. Cost of debt.

d. Technology.

e. Capital structure.

6. The Price Company will produce 55,000 widgets next year. Variable costs will equal 40 percent of sales, while fixed costs will total $110,000. At what price must each widget be sold for the company to achieve an EBIT of $95,000?

a. $2.00

b. $4.45

c. $5.00

d. $5.37

e. $6.21