FNAN 522 Exam (Mod 5 Homework)
Questions and Answers 2026-2027
Updated.
A company has $2 million in machinery expenses and $3 million in rent. It costs $30 per unit in
labor costs to produce the good, which is sold for $50 per unit. What is the break even point? -
Answer 250,000 units
A company produces 100,000 units that sell for $40. The company's variable costs per unit is
$25. The company's total fixed costs are $800,000. What is the company's degree of operating
leverage? - Answer 2.14
Managers of publicly traded corporations are often compensated at least in part based on firm
profitability, and bondholders prefer to receive principal and interest payments on time.
Leverage can increase firm profitability and make more money available for interest and
principal payments, so it appears that mangers' interests and bondholders' interests are well-
aligned. Which of the following is true about conflicts between managers and bondholders?
a. Managers' interests and bondholders' interests are well aligned only when firms are 100%
debt financed, but bankruptcy costs prevent this level of debt financing in practice.
b. Managers may under invest in projects if it appears that all proceeds will be absorbed by
bondholders, hurting both shareholders and bondholders.
c. There is a clear target balance between the amount of debt and equity financing that aligns
manager's interests with bondholders' interests.
d. - Answer b. Managers may under invest in projects if it appears that all proceeds will be
absorbed by bondholders, hurting both shareholders and bondholders.
If a company with stable earnings wanted to ensure that its managers' interests are aligned with
the company's shareholders, which of the following capital structures should it use?
a. A preferred equity-heavy capital structure that maximizes returns to shareholders by
magnifying ROE, maximizing the tax shield, up to the point that these benefits are higher than
anticipated bankruptcy costs.
b. An equity-heavy capital structure that maximizes returns to shareholders by magnifying ROE,
maximizing the tax shield, up to the point that these benefits are higher than anticipated
bankruptcy costs.
c. A debt-heavy capital structure that maximizes returns to shareholders by magnifying ROE,
maximizing the tax shield, up to the point that these benefits are higher than anticipated
bankruptcy costs.
d. The company's capital structure has no effect on a manager's interests. - Answer c. A debt-
heavy capital structure that maximizes returns to shareholders by magnifying ROE, maximizing
the tax shield, up to the point that these benefits are higher than anticipated bankruptcy costs.
Questions and Answers 2026-2027
Updated.
A company has $2 million in machinery expenses and $3 million in rent. It costs $30 per unit in
labor costs to produce the good, which is sold for $50 per unit. What is the break even point? -
Answer 250,000 units
A company produces 100,000 units that sell for $40. The company's variable costs per unit is
$25. The company's total fixed costs are $800,000. What is the company's degree of operating
leverage? - Answer 2.14
Managers of publicly traded corporations are often compensated at least in part based on firm
profitability, and bondholders prefer to receive principal and interest payments on time.
Leverage can increase firm profitability and make more money available for interest and
principal payments, so it appears that mangers' interests and bondholders' interests are well-
aligned. Which of the following is true about conflicts between managers and bondholders?
a. Managers' interests and bondholders' interests are well aligned only when firms are 100%
debt financed, but bankruptcy costs prevent this level of debt financing in practice.
b. Managers may under invest in projects if it appears that all proceeds will be absorbed by
bondholders, hurting both shareholders and bondholders.
c. There is a clear target balance between the amount of debt and equity financing that aligns
manager's interests with bondholders' interests.
d. - Answer b. Managers may under invest in projects if it appears that all proceeds will be
absorbed by bondholders, hurting both shareholders and bondholders.
If a company with stable earnings wanted to ensure that its managers' interests are aligned with
the company's shareholders, which of the following capital structures should it use?
a. A preferred equity-heavy capital structure that maximizes returns to shareholders by
magnifying ROE, maximizing the tax shield, up to the point that these benefits are higher than
anticipated bankruptcy costs.
b. An equity-heavy capital structure that maximizes returns to shareholders by magnifying ROE,
maximizing the tax shield, up to the point that these benefits are higher than anticipated
bankruptcy costs.
c. A debt-heavy capital structure that maximizes returns to shareholders by magnifying ROE,
maximizing the tax shield, up to the point that these benefits are higher than anticipated
bankruptcy costs.
d. The company's capital structure has no effect on a manager's interests. - Answer c. A debt-
heavy capital structure that maximizes returns to shareholders by magnifying ROE, maximizing
the tax shield, up to the point that these benefits are higher than anticipated bankruptcy costs.
