Which of the following statements are correct concerning the security market line (SML) approach to finding the cost of equity?

I. The SML approach considers the amount of systematic risk associated with the firm or stock under consideration

II. The SML approach can be applied to more firms than the dividend growth model can

III.The SML approach generally relies on the past to predict the future

	a.	II and III
	b.	I and II
	c.	I and III
	d.	I, II, and III

Which of the following statement(s) is (are) correct regarding operating leverage?

	a.	With high DOL, small change in sales volume estimates can get magnified into large change in operating cash flows
	b.	Operating leverage is the degree to which a firm or project relies on fixed financing costs, such as interest expense
	c.	The greater the degree of operating leverage, the lower is the variability of OCF due to change in sales (Q)
	d.	Zero fixed costs means DOL = 0 and thus OCF = 0.

Ralph is in charge of a project that has a degree of operating leverage of 2.5. The project currently generate 120 units in sales and $30,000 in OCF. What will be the new level of operating cash flow if Ralph expects an increase in units sold to 138 units? (hint: find the percentage change in sales (Q) first).

	a.	$75,000
	b.	$41,250
	c.	$60,750
	d.	$45,890

Plan I (All-equity or No Debt Plan)	Plan II (Levered Plan or Plan with debt)
Shares outstanding = 400,000 shares Debt = $0	Shares outstanding = 300,000 shares Debt = $4 million @ interest rate = 8%

Calculate the break-even EBIT. Find the EPS at break-even EBIT. Which plan is better for Moe if Moe expects its EBIT to be $1,350,000?

	a.	$1,400,000; 3.5; Plan I
	b.	$1,280,000; 3.2; Plan II
	c.	$1,280,000; 3.2; Plan I
	d.	$1,400,000; 3.5; Plan II