Choose the best answer

1.Conservatively leveraged Firm C and highly leveraged Firm H operate at the same level of earnings before interest and taxes where the return on assets is greater than the cost of debt.

		a.Firm C will have a higher return on equity than H.
		b.Firm H will have a higher return on equity than C.
		c.The return on equity will not be affected by financial leverage.
		d.The return on equity will be the same at an equal level of earnings.

2.Riley Co. is considering a short-term or long-term financing plan for $4,000,000 in assets. They expect the following one-year rates over the next three years: 6.5%, 7.75%, and 9%. Their long-term interest rate will be 7.5% for the three years. Assuming the rates follow their expectations, what will be the difference in interest costs over the three years?

		a.Long-term interest will be $30,000 more than short-term interest.
		b.Long-term interest will be $140,000 less than short-term interest.
		c.Long-term interest will be $30,000 less than short-term interest.
		d.None of the options

3.Which of the following is not a valid reason for holding cash?

		a.To meet transaction requirements
		b.To earn the highest return possible
		c.To satisfy emergency needs for funds
		d.To provide a compensating balance for a bank

4.Cash flow does not rely on which of the following?

		a.The payment patterns of customers
		b.The speed at which suppliers and creditors process checks
		c.The monetary policy of the Federal Reserve
		d.The efficiency of the banking system