1.

Operating leverage may be defined as:

A) the degree to which debt is used in financing the firm
B) the difference between price and variable costs
C) the extent to which capital assets and fixed costs are utilized
D) the difference between fixed costs and the contribution margin

2. Financial leverage:
A) reflects the firm's commitment to fixed, financial assets
B) has no impact on the earning of the firm
C) reflects the amount of debt used in the capital structure of the firm
D) primarily affects the left side of the balance sheet

3. The indifference point identifies:

A) equality of impact on eps between two financing plans
B) equality of impact on EBIT between two financing plans
C) equality of impact on revenue between two financing plans
D) equality of impact on number of shares between two financing plans

4. The degree of financial leverage may be defined as:

A) percent change in sales/percent change in volume
B) percent change in EPS/percent change in net income
C) percent change in EPS/percent change in EBIT
D) percent change in EPS/percent change in sales

5. To enhance overall operating results, a firm should prudently use which of the following:
A) operating leverage
B) financial leverage
C) combined leverage
D) conservative leverage

6. Financial risk relates to:

A) the ability of the firm to pay dividends
B) the ability of the firm to access capital markets for additional funds
C) the ability of the firm to meet debt obligations as they come due
D) the firm's financial risk premium

7. A higher degree of financial leverage may be desirable for:

A) a stable firm, with positive growth, under favorable economic conditions
B) an unstable firm operating in an uncertain environment
C) a stable firm operating in an uncertain environment
D) neither the stable nor unstable firm under any circumstances

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8. A high degree of financial leverage:
A) is a sign of astute financial management
B) will always decrease the cost of financing for the firm
C) will result in an increase of the firm's overall value in all cases
D) may increase the firm's risk and drive the price of the shares down

9. The more aggressive firm:

A) substitutes higher fixed costs for variable costs
B) substitutes lower fixed costs for variable costs
C) has lower potential profit above the break-even point
D) is normally more effectively managed

10. The highly financially leverage firm will typically:

A) has a higher EPS figure than the conservative firm
B) has a lower EPS figure than the conservative firm
C) uses less debt than the conservative firm
D) will produce the same EPS figure as the conservative firm

11. Degree of combined leverage:

A) should be minimized by the financial manager
B) affects only balance sheet items
C) decreases the firm's operating profit
D) shows the impact of sales or volume changes on bottom line EPS

12. Financial Leverage arises because of:

A) Fixed cost of production
B) Variable Cost
C) Interest Cost
D) None of the above

13. If a firm has a DOL of 2.8, it means:

A) If sales increase by 2.8%, the EBIT will increase by 1%
B) If EBIT increase by 2.896, the EPS will increase by 1 %
C) If sales rise by 1%, EBIT will rise by 2.8%
D) None of the above

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14. If a firm has no debt, which one is correct?
A) Operating Leverage is one
B) Financial Leverage is one
C) Operating Leverage is zero
D) Financial Leverage is zero

15. The basic limitation of the EBIT-EPS approach to capital structure is .

A) that it concentrates on the maximization of EPS rather than the maximization of the
wealth of the owners.

B) that the optimal capital structure is difficult to compute.

C) that its disregard for the presence of preferred stock in the capital structure.

D) that its disregard for the dividend policy of the firm.

16. Which of the following statements is not correct regarding the calculation of the degree of
total leverage (DTL)?

A) DTLS dollars = CVEBIT x DFLE(EBIT)

B) DTLQ units = DOLQ units x DFLEBIT of X dollars

C) DTLQ units = Q(P-V) / {Q(P-V) - FC - I - [PD/(I-T)]}

D) DTLS dollars = (EBIT + FC) / {EBIT - I - [PD/(I-T)]}

17. The point where the net present values of two projects are equal is referred to as the

A) internal rate of return

B) crossover point.

C) point of profitability.

D) payback points of equivalency.

18. What is the NPV for the following project if it’s cost of capital is 15 percent and its initial
after-tax cost is RM5,000,000 and it is expected to provide after-tax operating cash inflows
of RM1,800,000 in year 1, RM1,900,000 in year 2, RM1,700,000 in year 3 and RM1,300,000
in year 4?
A) RM1,700,000.
B) RM371,764.
C) -RM137,053.
D) -RM173,053.

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19. The ________ is the discount rate that equates the present value of the cash inflows with
the initial investment.
A) payback period
B) average rate of return
C) cost of capital
D) internal rate of return

20. A firm is evaluating a proposal which has an initial investment of RM35,000 and has cash
flows of RM10,000 in year 1, RM20,000 in year 2, and RM10,000 in year 3. The payback
period of the project is
A) 1 year.
B) 2 years.
C) between 1 and 2 years.
D) between 2 and 3 years.

21. The __________ is useful for assets that lose most of their value at the beginning of the
asset’s life while the __________ is useful for assets that lose their value in a steady manner.
A) double declining balance; modified accelerated cost recovery system
B) replacement decision; extension decision
C) modified accelerated cost recovery system; simplified straight-line depreciation
D) incremental cash flows approach; accelerated depreciation approach

22. A RM60,000 outlay for a new machine with a usable life of 15 years is called
A) capital expenditure.
B) operating expenditure.
C) replacement expenditure.
D) expansion expenditure.

23. ________ projects do not compete with each other; the acceptance of one ________ the
others from consideration.
A) Capital; eliminates
B) Independent; does not eliminate
C) Mutually exclusive; eliminates
D) Replacement; does not eliminate

24. A firm with limited dollars available for capital expenditures is subject to
A) capital dependency.
B) mutually exclusive projects.
C) working capital constraints.
D) capital rationing.

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25. The cash flows of any project having a conventional pattern include all of the basic
components EXCEPT
A) initial investment.
B) operating cash outflows.
C) operating cash inflows.
D) terminal cash flow.

26. Relevant cash flows for a project are best described as

A) incidental cash flows.
B) incremental cash flows.
C) sunk cash flows.
D) accounting cash flows.

27. The book value of an asset is equal to the

A) fair market value minus the accounting value.
B) original purchase price minus annual depreciation expense.
C) original purchase price minus accumulated depreciation.
D) depreciated value plus recaptured depreciation.

28. A corporation is considering expanding operations to meet growing demand. With the
capital expansion, the current accounts are expected to change. Management expects cash
to increase by RM20,000, accounts receivable by RM40,000, and inventories by RM60,000.
At the same time accounts payable will increase by RM50,000, accruals by RM10,000, and
long-term debt by RM100,000. The change in net working capital is
A) an increase of RM120,000.
B) a decrease of RM40,000.
C) a decrease of RM120,000.
D) an increase of RM60,000.

29. GEQ Enterprise is considering a new project. The project will require the purchase of an
equipment at the price of RM300,000, and RM100,000 for additional investment in net
working capital. The equipment has an 8-year life and will be depreciated straight-line to a
zero book value. At the end of the project life, the equipment is expected to be sold at
RM50,000. The project is expected to generate annual sales of RM445,000 and reduction in
annual maintenance costs of RM130,000. The tax rate is 25 percent and the required rate of
return is 10 percent. What is the initial cost of this project?
A) RM137,500
B) RM337,500
C) RM400,000
D) RM440,625

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30. GEQ Enterprise is considering a new project. The project will require the purchase of an
equipment at the price of RM300,000, and RM100,000 for additional investment in net
working capital. The equipment has an 8-year life and will be depreciated straight-line to a
zero book value. At the end of the project life, the equipment is expected to be sold at
RM50,000. The project is expected to generate annual sales of RM445,000 and reduction in
annual maintenance costs of RM130,000. The tax rate is 25 percent and the required rate of
return is 10 percent. What is the annual operating cash flow of this project?

A) RM137,500

B) RM337,500

C) RM400,000

D) RM440,625

31. GEQ Enterprise is considering a new project. The project will require the purchase of an
equipment at the price of RM300,000, and RM100,000 for additional investment in net
working capital. The equipment has an 8-year life and will be depreciated straight-line to a
zero book value. At the end of the project life, the equipment is expected to be sold at
RM50,000. The project is expected to generate annual sales of RM445,000 and reduction in
annual maintenance costs of RM130,000. The tax rate is 25 percent and the required rate of
return is 10 percent. What is the terminal cash flow of this project?

A) RM137,500

B) RM337,500

C) RM400,000

D) RM440,625