1. Financial forecasting generally begins with a forecast of the firms sales in terms of both units and pesos. true or false

2. The trade-off theory of capital structure states that debt initially adds value because interest is not tax-deductible but that debt also brings costs associated with actual or potential bankruptcy. true or false

3. Capital Asset Pricing Model shows how capital structure choices affect a firms return on equity and its risk. true or false

4. There are 4 steps in the analysis of each potential capital structure, namely: estimate the interest rate the firm will pay; estimate the cost of equity; estimate the weighted average cost of capital; estimate the value of operations, which is the present value of free cash flows discounted by the new weighted average cost of capital. true or false

5. Financial risk is the additional risk placed on the common stockholders as a result of the decision to finance with debt. true or false

6. A financial plan has three key components, namely: the sales forecast, forecasted financial statements, and methods for raising any needed internal financing. true or false

7. Capital Asset Pricing Model shows how capital structure choices affect a firms return on equity and its risk. true or false

8. Financial leverage is the extent to which fixed-income securities (debt and preferred stock) are used in a firms capital structure. true or false

9. businesses that employ highly skilled workers who must be retained and paid even when sales are low; and firms with high product development costs that must be maintained to complete ongoing research and development projects .true or false

10. The break-even point in units is computed by dividing fixed cost over unit contribution margin. true or false

11. The break-even point occurs when earnings before interest and taxes (EBIT) equal zero. true or false

7. It the chance that some unfavorable event will occur. (1 Point) Risk Probability Beta Market risk 12. It is an equation that shows the relationship between a security's market risk and its required rate of return. (1 Point) Security Market Line Constant Growth Model Cost of Capital Co-efficient of variation 18. It describes how risk affects rates of return, the tools to estimate the required rates of return for bonds, preferred stock, and common stock, and how firms use these rates of return to estimate their costs of capital. (1 Point) Capital Assets Pricing Model Constant Growth Model Cost of Capital Co-efficient of variation 22. It is similar to both bonds in some aspect where it has a par value, and a fixed amount of dividends must be paid before dividends can be paid on the common stock. (1 Point) Preference share Ordinary share Corporation Common stock 25. It is the chance that the event will occur. (1 Point) Probability Beta Market risk Risk