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Factors that affect firm’s business risk.

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1. A company's fixed operating costs are $500,000, its variable costs are $3.00 per unit, and the product's sales price is $4.00. What is the company's breakeven point, i.e., at what unit sales volume would its income equal its costs?






2. Millman Electronics will produce 60,000 stereos next year. Variable costs will equal 50% of sales, while fixed costs will total $120,000. At what price must each stereo be sold for the company to achieve an EBIT of $95,000?

a. $6.57





3. An increase in the debt ratio will generally have no effect on

a.Business risk. risk.

c.Financial risk.

d.Market risk.

e. it will not affect any measure of risk.

4.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.

5.Which of the following statements is CORRECT?

a.A firm's business risk is solely determined by the financial characteristics of its industry.

b.The factors that affect a firm's business risk are determined partly by industry characteristics and partly by economic conditions. Unfortunately, these and other factors that affect a firm's business risk are not subject to any degree of managerial control.

c.One of the benefits to a firm of being at or near its target capital structure is that it eliminates any bankruptcy risk.

d.The firm's financial risk may have both market risk and diversifiable risk components.

e.The amount of debt in its capital structure does not affect a company's business risk.

6.Which of the following statements is CORRECT?

a.As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS.

b.The optimal capital structure simultaneously maximizes EPS and minimizes the WACC.

c.The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the stock price.

d.The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC.

e.The optimal capital structure simultaneously maximizes stock price and minimizes the WACC.

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