FIN3403 Chapter 12 & 13 UCF Exam All
Questions Answered Correct.
Business risk - Answer the risk of the firms’ future earnings that is a direct result of the
particular line of business chosen by the firm
Financial risk - Answer risk driven by the presence of fixed finance costs in the firm’s capital
structure (as opposed to variable finance costs such as dividend declared and paid)
Operating Leverage - Answer Results from operating costs that are fixed and do not vary with
the level of firm sales
Financial Leverage - Answer Results from the firm’s use of sources financing that requires a
fixed rate of return. The primary example of such a form of financing is fixed interest and
principle on specified dates.
Break-even analysis - Answer The # of units a firm must sell before it starts to earn a profit
Variable Costs - Answer expenses that vary in total as output changes. Also called direct costs.
Fixed costs - Answer costs that do not vary in total dollar amount as sales volume or quantity
of output changes. Also called indirect costs
Optimal Capital Structure - Answer the capital structure that minimizes the firms composite of
cost of capital (maximizes the common stock price) for raising a given amount of funds)
DCL - Answer combined, or total leverage the result of the combined effects of both operating
and financial leverage
Debt capacity - Answer the maximum amount of debt that the firm can include in its capital
structure and still maintain its current credit rating
DOL (Operating Leverage) - Answer results from operating costs that are fixed and do not vary
with the level of firm sales
Questions Answered Correct.
Business risk - Answer the risk of the firms’ future earnings that is a direct result of the
particular line of business chosen by the firm
Financial risk - Answer risk driven by the presence of fixed finance costs in the firm’s capital
structure (as opposed to variable finance costs such as dividend declared and paid)
Operating Leverage - Answer Results from operating costs that are fixed and do not vary with
the level of firm sales
Financial Leverage - Answer Results from the firm’s use of sources financing that requires a
fixed rate of return. The primary example of such a form of financing is fixed interest and
principle on specified dates.
Break-even analysis - Answer The # of units a firm must sell before it starts to earn a profit
Variable Costs - Answer expenses that vary in total as output changes. Also called direct costs.
Fixed costs - Answer costs that do not vary in total dollar amount as sales volume or quantity
of output changes. Also called indirect costs
Optimal Capital Structure - Answer the capital structure that minimizes the firms composite of
cost of capital (maximizes the common stock price) for raising a given amount of funds)
DCL - Answer combined, or total leverage the result of the combined effects of both operating
and financial leverage
Debt capacity - Answer the maximum amount of debt that the firm can include in its capital
structure and still maintain its current credit rating
DOL (Operating Leverage) - Answer results from operating costs that are fixed and do not vary
with the level of firm sales
