FIN 300 FINAL EXAM |160 COMPLETE QUESTIONS WITH EXPERT
SOLUTIONS | 2026 LATEST UPDATED | GET A+
Business risk - (Answer)The level and nature of risk attributable to a firm's activities and
operations, and ignoring the risks associated with the firm's capital structure.
Asymmetric - (Answer)The situation in which outsiders, such as external shareholders, credits,
suppliers, and customers have less and inferior information about a firm's past, current, and
future conditions and prospects, compared to the firm's managers.
Operating leverage - (Answer)A firm's use of relatively high fixed, as opposed to variable,
operating costs, such as capital-intensive productive processes instead of labor-intensive
methods.
Financial leverage - (Answer)This practice of employing a large portion of fixed-cost sources of
financing, such as debt securities and preferred stock, exposes a firm to business risk.
Reserve borrowing capacity - (Answer)The financial flexibility available to a firm which allows
it to borrow additional debt capital when needed or desired as a result of using less than the
optimal level of debt in its current capital structure.
,Signal - (Answer)Management's decision to issue new common stock versus new debt securities
in response to its evaluation of the firm's future opportunities.
Financial risk - (Answer)The risk to the firm's shareholders resulting from management's
decision to employ fixed-cost financing sources in the firm's capital structure.
EPS indifference point - (Answer)The level of sales at which a firm;s earnings per share (EPS)
are the same, regardless of which of two alternative capital structures are compared.
Optimal capital structure - (Answer)The mix of debt, preferred stock, and common stock that
minimizes a firm's weighted average cos of capital.
Capital structure - (Answer)The combination of common equity, preferred stock, and debt capital
used to finance a firm's assets.
% ΔEBIT / % ΔSales - (Answer)An index for a *specific level* of sales that measures the effect
of change in sales (S) on the firm's operating income (EBIT). Alternatively, it is an indicator of
the riskiness (variability) of a firm's EBIT to the use of fixed costs (F) in the firm's cost structure.
, EBIT / (EBIT - I) - (Answer)An index for a specific range of sales that measures the effect of a
change in EBIT on a firm;s earnings per share (ESP). At a constant level of sales, the DFL value
will vary with a change in the amount of interest expense (I) incurred. This implies that the DFL
is an indicator of a firm's *financial* risk.
(S - VC) / (s - VC - F) - (Answer)An index of the firm;s total risk resulting from its use of
operating and financial leverage. Stated differently, it is an indicator of the consequences for the
firm's EPS for its use of *fixed* operating and financial costs.
An optimal captial structure is characterized by two important attributes: First, it minimizes the
firm's _________, and second, it maximizes _________, which should make our shareholders
very happy. - (Answer)weighted average cost of capital, the value of the firm
A firm may use debt and equity financing that differs from its targeted amounts if its business
activities or its industry becomes... - (Answer)more risky or more competative
The availability of _________ may prompt a company to borrow or issue new shares and thereby
deviate from its target capital structure. - (Answer)unusually inexpensive sources of capital
Which firm has more financial risk?
SOLUTIONS | 2026 LATEST UPDATED | GET A+
Business risk - (Answer)The level and nature of risk attributable to a firm's activities and
operations, and ignoring the risks associated with the firm's capital structure.
Asymmetric - (Answer)The situation in which outsiders, such as external shareholders, credits,
suppliers, and customers have less and inferior information about a firm's past, current, and
future conditions and prospects, compared to the firm's managers.
Operating leverage - (Answer)A firm's use of relatively high fixed, as opposed to variable,
operating costs, such as capital-intensive productive processes instead of labor-intensive
methods.
Financial leverage - (Answer)This practice of employing a large portion of fixed-cost sources of
financing, such as debt securities and preferred stock, exposes a firm to business risk.
Reserve borrowing capacity - (Answer)The financial flexibility available to a firm which allows
it to borrow additional debt capital when needed or desired as a result of using less than the
optimal level of debt in its current capital structure.
,Signal - (Answer)Management's decision to issue new common stock versus new debt securities
in response to its evaluation of the firm's future opportunities.
Financial risk - (Answer)The risk to the firm's shareholders resulting from management's
decision to employ fixed-cost financing sources in the firm's capital structure.
EPS indifference point - (Answer)The level of sales at which a firm;s earnings per share (EPS)
are the same, regardless of which of two alternative capital structures are compared.
Optimal capital structure - (Answer)The mix of debt, preferred stock, and common stock that
minimizes a firm's weighted average cos of capital.
Capital structure - (Answer)The combination of common equity, preferred stock, and debt capital
used to finance a firm's assets.
% ΔEBIT / % ΔSales - (Answer)An index for a *specific level* of sales that measures the effect
of change in sales (S) on the firm's operating income (EBIT). Alternatively, it is an indicator of
the riskiness (variability) of a firm's EBIT to the use of fixed costs (F) in the firm's cost structure.
, EBIT / (EBIT - I) - (Answer)An index for a specific range of sales that measures the effect of a
change in EBIT on a firm;s earnings per share (ESP). At a constant level of sales, the DFL value
will vary with a change in the amount of interest expense (I) incurred. This implies that the DFL
is an indicator of a firm's *financial* risk.
(S - VC) / (s - VC - F) - (Answer)An index of the firm;s total risk resulting from its use of
operating and financial leverage. Stated differently, it is an indicator of the consequences for the
firm's EPS for its use of *fixed* operating and financial costs.
An optimal captial structure is characterized by two important attributes: First, it minimizes the
firm's _________, and second, it maximizes _________, which should make our shareholders
very happy. - (Answer)weighted average cost of capital, the value of the firm
A firm may use debt and equity financing that differs from its targeted amounts if its business
activities or its industry becomes... - (Answer)more risky or more competative
The availability of _________ may prompt a company to borrow or issue new shares and thereby
deviate from its target capital structure. - (Answer)unusually inexpensive sources of capital
Which firm has more financial risk?
