Week 03 Quiz
Welcome to the Week 3 Quiz. Only one attempt will be accepted. If you need to leave the quiz, you may do so by closing your browser; however, your progress will not be saved. Once you hit SUBMIT, your quiz will be complete. Each question will go 0.125% towards your final grade. Good luck!
| Question #1 (1 point) | |
| A firm sells 70,000 units, and their fixed costs are $60,000, variable cost per unit is $2.20, and the price per unit is $3.20. If a firm has $3,000 in interest payments, what is the firm’s degree of combined leverage? | |
| 7.5 | |
| 10.0 | |
| 12.5 | |
| 15.0 |
| Question #2 (1 point) | |
| Which of the following is a consequence of level production in a company that experiences seasonal fluctuations in sales? | |
| Current assets fluctuate up and down when sales and production are not equal | |
| Permanent current assets tend to decrease as companies experience growth while fixed assets remain steady | |
| Companies must take out loans during peak sales months and pay them back during slow months | |
| All of the above are consequences of level production |
| Question #3 (1 point) | |
| Leverage magnifies returns as volume increases as well as magnifies losses as volume decreases. | |
| False | |
| True |
| Question #4 (1 point) | |
| An aggressive, risk-oriented firm is more likely to borrow long term and and maintain relatively high levels of liquidity, hoping to increase profits. | |
| True | |
| False |
| Question #5 (1 point) | |
| When comparing the potential risk of multiple companies, the firms with higher coefficients of variance have higher business risk. | |
| True | |
| False |
| Question #6 (1 point) | |
| Which of the following statements are potential reasons to explain the shape of the yield curve? | |
| Short-term securities have greater liquidity, therefore higher rates must be offered to long-term bond buyers | |
| Various financial institutions must invest in whichever security best matches their needs | |
| Long-term rates reflect the average of short-term expected rates over the long-term security’s life span | |
| All of the above statements partially explain the shape of the yield curve |
| Question #7 (1 point) | |
| When interest rates are high and expected to decline, the financial manager generally tries to borrow short term | |
| True | |
| False |
| Question #8 (1 point) | |
| Bluthe Industries manufactures a line of miniature model homes. Their average selling price is $400 per unit with a variable cost of $240 per unit. Bluthe’s annual fixed expense is $800,000 per year. Calculate the company’s EBIT at 6,000 units. | |
| $160,000 | |
| $480,000 | |
| $800,000 | |
| $0 |
| Question #9 (1 point) | |
| As a firm’s debt level decreases, their interest payments increase which increase the company’s degree of financial leverage. | |
| False | |
| True |
| Question #10 (1 point) | |
| Johnny Corp. faces a financing decision with their current assets. Two plans have been submitted to address their needs. Plan A would require using short term financing to pay all of their current assets. Plan B would instead require long-term financing to pay a large majority of their current assets. There is a 70% chance short-term interest rates will remain steady throughout the year, but management feels there is a 30% chance there will soon be a tight money period and they could rise significantly. If interest rates remain unchanged, plan A is expected to leave the company with a $7,200 higher earnings after taxes than plan B. However, if interest rates increase, plan A is expected to leave the company with $28,800 lower earnings after taxes when compared to plan B. Which plan should Johnny Corp. go with and why? | |
| Plan A – There is an expected value of return of $1,800 for plan A versus plan B | |
| Plan B – There is a negative expected value of return of -$3,600 for plan A versus plan B | |
| Plan A – There is an expected value of return of $3,600 for plan A versus plan B | |
| Plan B – There is a negative expected value of return of -$1,800 for plan A versus plan B |
| Question #11 (1 point) | |
| Bluthe Industries manufactures a line of miniature model homes. Their average selling price is $400 per unit with a variable cost of $240 per unit. Bluthe’s annual fixed expense is $800,000 per year. What is the break-even point in units for the company? | |
| 5,000 | |
| 4,000 | |
| 2,000 | |
| 3,000 |
| Question #12 (1 point) | |
| The responsiveness of a firm’s earnings before interest and taxes (EBIT) to fluctuations in sales is referred to as | |
| managerial leverage | |
| combined leverage | |
| financial leverage | |
| operating leverage |
| Question #13 (1 point) | |
| A firm sells 70,000 units, and their fixed costs are $60,000, variable cost per unit is $2.20, and the price per unit is $3.20. Which statement best describes the firm’s degree of operating leverage? | |
| A one percent increase in volume will produce a 5% decrease in operating income | |
| A one percent increase in volume will produce a 5% increase in operating income | |
| A one percent increase in volume will produce a 7% increase in operating income | |
| A one percent increase in volume will produce a 7% decrease in operating income |
| Question #14 (1 point) | |
| In most companies, working capital management concentrates on the following working capital actions except | |
| setting minimum levels for cash | |
| using notes payable to assure adequate cash availability | |
| controlling inventory by setting inventory levels and controls | |
| investing all excess cash in long-term debt instruments |
| Question #15 (1 point) | |
| An increased amount of working capital results in increases in both profitability and risk. | |
| False | |
| True |
| Question #16 (1 point) | |
| A firm sells 70,000 units, and their fixed costs are $60,000, variable cost per unit is $2.20, and the price per unit is $3.20. Which statement best describes the firm’s position? | |
| The firm is earning a profit of $10,000 | |
| The firm is breaking even | |
| The firm is earning a profit of $15,000 | |
| The firm is operating at a loss of $15,000 |
