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Corporate Finance /Sample Questions Question 1 Degree of Operation leverage The following table gives some accounting information of Fims both firms' sales drop 20%, which firm has higher operation leverage? A and B in 2015. Suppose that in 2016 2015 Firm B 700 Fix Costs Variable Costs Total Costs Sales Firm A 350 650 1,000 1,000 Answer: Firm B 2016 FC VC Firm A 350 Firm B 700 870 EBIT -20% -34% 1.70 %Chg in EBIT Question 2 Portfolio Theory Jeannie is considering invest in the following two securities A and B Stock B 0.06 0.10 State Stock A Recession Bellow Average Average Above Average Booming Probabilit 0.10 0.20 0.40 0.20 0.10 0.08 A, Calculate the expected return and standard deviation for the two securities, respectively B Calculate the covariance and the correlation coefficient of the returns of the two securities C) Suppose Jeannie invests $5,000 in security I and $5,000 in security II, calculate the portfolio expected retur and portfolio standard deviation.en If the market risk-free interest rate is 3.5%, and Jeannie only has S 10,000, can she investm 000 in the portfolio of the two securities (say, $9,000 in security A and $9,000 in security B)? What standard deviation of the new portfolio? Answer AY E(Ra)- 5.500% .014%Var 5.166%-/ Var(Rb)-1 -0.232% Var(Ra)- 0.008125 0.0 -49.712% B) / Cov(A,B C) D) Borrow $8,000 Wa=-80% 6.560%! Std(Rp)- 7.066%