Question 1

Variation in a company's income stream results from its choice of business line,its choice of an operating cost structure,and its choice of a capital structure.

Accepted Answer

A company's income stream can vary depending on the types of business lines it operates in, the level of operating costs it incurs, and the composition of its capital structure, which includes factors such as debt-to-equity ratios and interest rates. These choices can impact the amount and stability of a company's revenue and profits.

Question 2

A decrease in the level of production results in decreased fixed cost per unit.

Accepted Answer

Fixed costs remain constant regardless of the level of production. Therefore, a decrease in the level of production does not result in a decrease in fixed cost per unit.

Question 3

The break-even quantity of output is that quantity of output,in units,that results in an EBIT equal to zero.

Accepted Answer

This statement is true. The break-even quantity of output is the point at which total revenue is equal to total costs, resulting in EBIT (earnings before interest and taxes) equal to zero. Any quantity of output above the break-even point will generate positive EBIT, while any quantity of output below the break-even point will result in negative EBIT.

Question 4

The four basic determinants of business risk include all of the following EXCEPT
A)the stability of the domestic economy.
B)the level of fixed cost used in the company's production process.
C)sensitivity to the business cycle.
D)competitive pressures in the firm's industry.

Accepted Answer

The answer of The four basic determinants of business risk...

Question 5

Companies that sell basic necessities face the highest levels of business risk because consumers will price shop aggressively for items they purchase on a regular basis.

Accepted Answer

Companies selling basic necessities often face lower levels of business risk because the demand for their products is relatively stable and inelastic, meaning consumers will continue to purchase these items regardless of price changes.

Question 6

As the volume of production increases the variable cost-per unit of the product decreases.

Accepted Answer

Variable cost per unit remains constant regardless of the volume of production; it is the total variable cost that increases with the increase in production volume.

Question 7

Break-even analysis ignores fixed costs because fixed costs do not change.

Accepted Answer

Break-even analysis does not ignore fixed costs, in fact, fixed costs are an important part of the calculation since they need to be covered before a business can reach its break-even point. The contribution margin (sales - variable costs) is used to cover fixed costs and determine the break-even point.

Question 8

Corporations utilize external financing either because they do not have sufficient earnings to reinvest or they want to rebalance their capital structures.

Accepted Answer

Corporations may utilize external financing when they do not have sufficient earnings or want to rebalance their capital structures. This can include issuing debt or equity, taking out loans, or seeking investors.

Question 9

Business risk refers to the relative dispersion of a firm's earnings before interest and taxes.

Accepted Answer

Business risk indeed refers to the variability or dispersion of a firm's earnings before interest and taxes, which may result from factors such as competition, market demand, technological changes, and operational efficiency.

Question 10

Sales of consumer durable goods,such as appliances,are more sensitive to swings in the business cycle,and therefore companies in these industries face a higher level of operating risk.

Accepted Answer

The answer of Sales of consumer durable goods,such as appliances,are...

Question 11

A high degree of variability in a firm's earnings before interest and taxes refers to
A)business risk.
B)financial risk.
C)financial leverage.
D)operating leverage.

Accepted Answer

Business risk refers to the variability in a firm's earnings before interest and taxes (EBIT) due to its operational environment. This includes factors like demand for the firm's products, input costs, and competition, which can all affect earnings independently of how the firm is financed.

Question 12

Break-even analysis is a short-term concept because,in the long run,all costs are variable.

Accepted Answer

The answer of Break-even analysis is a short-term concept because,in...

Question 13

If sales double,the break-even model assumes that total variable costs will double.

Accepted Answer

The break-even model assumes that variable costs will increase proportionally with sales. Therefore, if sales double, total variable costs are expected to double as well under this model.

Question 14

Private equity funds tend to focus their investments in situations where promised returns are very high and the need for funds is brief.

Accepted Answer

Private equity funds typically seek high returns on their investments and are focused on shorter-term liquidity events, such as IPOs or sales, rather than long-term ownership of a company.

Question 15

Fixed costs are called indirect costs while variable costs are called direct costs.

Accepted Answer

The answer of Fixed costs are called indirect costs while...

Question 16

Business risk refers to the relative dispersion (variability)of a company's net income.

Accepted Answer

Business risk actually refers to the potential that a company will have lower than anticipated profits or experience a loss rather than making a profit, due to uncertainties in its environment, not just the variability of its net income.

Question 17

The three major components responsible for variation in a company's income stream are business risk,operating risk,and financial risk.

Accepted Answer

Business risk refers to the level of uncertainty and variability that a company faces in its operations and market conditions. Operating risk refers to the risk associated with a company's operating expenses, while financial risk refers to the risk associated with a company's financing and debt structure. These three components together impact a company's income stream and overall financial performance.

Question 18

A key tool for evaluating business risk is break-even analysis.

Accepted Answer

The answer of A key tool for evaluating business risk...

Question 19

Business risk refers to
A)the risk associated with financing a firm with debt.
B)the variability of a firm's expected earnings before interest and taxes.
C)the uncertainty associated with a firm's CAPM.
D)the variability of a firm's stock price.

Accepted Answer

Business risk refers to the variability of a firm's expected earnings before interest and taxes (EBIT). It is the risk that a firm may not be able to generate sufficient revenue to cover its operating costs, resulting in a lower EBIT than expected. A high degree of business risk may make it difficult for a firm to meet its financial obligations, such as debt payments, and may lead to bankruptcy. Therefore, it is important for investors and creditors to assess a firm's business risk before investing or lending.

Question 20

As production levels increase,fixed costs stay the same in total,but decrease on a per unit basis.

Accepted Answer

Fixed costs are costs that do not vary with production levels, such as rent or salaries. As production levels increase, the fixed costs remain the same in total but are spread out over more units, therefore decreasing on a per unit basis.

Quiz 12: Determining the Financing Mix