Corporate Finance, Part 1 1. Break-even analysis requires knowing the relationship between A. sales and total costs. B. sales and earnings. C. sales and assets. D. total revenues and fixed costs. 2. Break-even analysis is concerned with the relationship between A. dividends and retained earnings. B. total costs and revenues. C. debt and equity. D. financial leverage and risk. 3. Which of the following is a correct statement about operating leverage? A. Operating leverage is associated with less risk and more certainty. B. Operating leverage results from use of fixed instead of variable cost. C. Operating leverage results from using debt financing. D. Operating leverage is affected by the demand for the product. 4. A product sells for $2 per unit. If fixed costs are $200 and variable costs are $1 per unit, what is the break-even level of output? A. 150 units B. 100 units C. 50 units D. 200 units 5. Which of the following situations would provide corporate management with the strongest rationale to carry forward current-year losses? A. Early in his first term this year, the President of the United States initiated legislation and signed into law a significant increase in income tax rates. B. Management projects taxable income to remain unchanged over the next five years. C. Management projects pre-tax losses over the next two years, and possibly even four years into the future. D. Congress just passed a very popular bill that reduces marginal federal income tax rates. 6. Which of the following is an advantage of a corporation? A. Elimination of double taxation B. Ease of formation C. Permanence D. Dilution of ownership 7. Which of the following is a correct statement about corporate losses? A. They are carried forward to future years. B. They are carried forward three years and then carried back. C. They are carried back three years and then carried forward. D. They offset other sources of income in prior years. 8. The greater the degree of operating leverage, the larger is the variability of A. operating income. B. revenues. C. interest. D. debt financing. 9. If Sam's Diner has an EBIT of $350,000, what are the diner's net earnings after paying $50,000 in taxes and $34,000 in interest? A. $434,000 B. $266,000 C. $334,000 D. $311,000 10. If a firm substitutes fixed for variable costs, which of the following will occur? A. The degree of operating leverage will be increased. B. The profits will always be higher. C. The use of financial leverage will be increased. D. The break-even level of output will be reduced. 11. Which of the following tends to vary spontaneously with changes in the level of sales? A. Plant B. Accounts payable C. Long-term debt D. Paid-in capital 12. Which of the following is usually a variable expense? A. Salaries B. Rent C. Insurance premiums D. Wages 13. Which of these situations offers the be.

1. Corporate Finance, Part 1
1. Break-even analysis requires knowing the relationship
between
A. sales and total costs.
B. sales and earnings.
C. sales and assets.
D. total revenues and fixed costs.
2. Break-even analysis is concerned with the relationship
between
A. dividends and retained earnings.
B. total costs and revenues.
C. debt and equity.
D. financial leverage and risk.
3. Which of the following is a correct statement about operating
leverage?
A. Operating leverage is associated with less risk and more
certainty.
B. Operating leverage results from use of fixed instead of
variable cost.
C. Operating leverage results from using debt financing.

2. D. Operating leverage is affected by the demand for the
product.
4. A product sells for $2 per unit. If fixed costs are $200 and
variable costs are $1 per
unit, what is the
break-even level of output?
A. 150 units
B. 100 units
C. 50 units
D. 200 units
5. Which of the following situations would provide corporate
management with the
strongest rationale to
carry forward current-year losses?
A. Early in his first term this year, the President of the United
States initiated legislation and signed
into law a significant increase
in income tax rates.
B. Management projects taxable income to remain unchanged
over the next five years.
C. Management projects pre-tax losses over the next two years,
and possibly even four years into the

3. future.
D. Congress just passed a very popular bill that reduces
marginal federal income tax rates.
6. Which of the following is an advantage of a corporation?
A. Elimination of double taxation
B. Ease of formation
C. Permanence
D. Dilution of ownership
7. Which of the following is a correct statement about corporate
losses?
A. They are carried forward to future years.
B. They are carried forward three years and then carried back.
C. They are carried back three years and then carried forward.
D. They offset other sources of income in prior years.
8. The greater the degree of operating leverage, the larger is the
variability of
A. operating income.
B. revenues.
C. interest.
D. debt financing.

4. 9. If Sam's Diner has an EBIT of $350,000, what are the diner's
net earnings after paying
$50,000 in taxes
and $34,000 in interest?
A. $434,000
B. $266,000
C. $334,000
D. $311,000
10. If a firm substitutes fixed for variable costs, which of the
following will occur?
A. The degree of operating leverage will be increased.
B. The profits will always be higher.
C. The use of financial leverage will be increased.
D. The break-even level of output will be reduced.
11. Which of the following tends to vary spontaneously with
changes in the level of
sales?
A. Plant
B. Accounts payable
C. Long-term debt
D. Paid-in capital

5. 12. Which of the following is usually a variable expense?
A. Salaries
B. Rent
C. Insurance premiums
D. Wages
13. Which of these situations offers the best rationale for
organizing a business as a
limited partnership?
A. Management needs to raise money through a stock offering,
but does not want to relinquish
control of the business to
stockholders.
B. You want your small new business, which is operating out of
your garage, to pay you and your
partner (your spouse)
dividends for which income tax will only be paid by you or your
business, not both.
C. Management rejects the idea of personally assuming liability
for the business.
D. You're an entrepreneur and you want two others' expertise,
former business partners, to help
execute your business plan.

6. 14. Currently, a firm's accounts payable is 5 percent of sales. If
the level of sales is
anticipated to increase
from $10,000 to $20,000, what is the level of accounts payable
forecasted by the percent
of sales method?
A. $500
B. $750
C. $1,000
D. $250
15. A firm's sales increased by 50 percent and inventory was
$100,000. According to the
percent of sales
method of forecasting, what will the new inventory be?
A. $175,000
B. $150,000
C. $100,000
D. $120,000
16. If ABC, Inc. has $650,000 in sales and $230,000 in
expenses, what are the firm's

7. earnings before
interest and taxes (EBIT)?
A. $420,000
B. $850,000
C. $650,000
D. $325,000
17. Which of the following events would be most likely to
increase the quantity
breakeven point, assuming
other factors remain constant?
A. XYZ Corp agrees to increase its sales-commissions paid to
employees by 12 percent.
B. The city council has finally been persuaded: Your taxi
business will pay lower water and sewer
rates.
C. Reduced marketplace competition enables LMN Corporation
to raise its selling price for finance
textbooks.
D. The pressure has subsided: The property owner, who rents
space to your small manufacturing
plant, has agreed to blacktop

8. the employee and customer parking lot.
18. A firm does not obtain financial leverage by
A. issuing common stock.
B. borrowing from the bank.
C. issuing preferred stock.
D. issuing bonds.
19. If a firm produces 50,000 widgets and sells each unit for
$20.50, what is the total
revenue generated by
this production?
A. $100,250
B. $10,250
C. $1,025,000
D. $10,250,000
20. A union contract suggests that labor costs may be
A. a noncash expense.
B. variable.
C. undetermined.
D. fixed.
21. The flotation costs of issuing new securities
A. don't affect the cost of capital.

9. B. encourage external financing.
C. decrease the cost of capital.
D. encourage the retention of earnings.
22. The internal rate of return and net present value methods of
capital budgeting assume
that the cash flows
are reinvested at the
A. cost of capital for NPV and the internal rate of return for
IRR.
B. cost of capital.
C. cost of capital for IRR and the internal rate of return for
NPV.
D. internal rate of return.
23. Which of the following statements about the cost of debt is
correct?
A. The cost of debt is greater than the cost of preferred stock.
B. The cost of debt is equal to the firm's interest rate.
C. The cost of debt is less than the cost of equity.
D. The cost of debt is greater than the cost of equity.
24. If the net present values of two mutually exclusive

10. investments are positive, a firm
should select
A. the investment with the higher present value.
B. neither investment.
C. both investments.
D. the investment with the higher net present value.
25. Which of the following statements about retained earnings
is correct?
A. Retained earnings have the same cost as new shares of stock.
B. Retained earnings are cheaper than the cost of new shares.
C. Retained earnings are the firm's cheapest source of funds.
D. Retained earnings have no cost.
26. A firm should make an investment if the present value of the
cash inflows on the
investment is
A. less than zero.
B. greater than zero.
C. greater than the cost of the investment.
D. less than the cost of the investment.
27. NPV may be preferred to IRR because
A. NPV makes more conservative assumptions concerning
reinvesting.

11. B. NPV excludes salvage value.
C. IRR excludes salvage value.
D. IRR makes more conservative assumptions concerning
reinvesting.
28.
Coupon rate = 7 percent
Average tax rate = 32%
Price of common stock = $80
Price of preferred stock = $50
Bond yield risk premium = 7%
Return of the market = 12%
Marginal tax rate = 35%
Common stock dividend (Do) = $6
Preferred stock dividend (Do) = $4
Growth rate of common stock dividend = 6%
Risk-free rate of return = 6%
Beta = 1.2

12. According to the information given, what is the cost of equity
using the bond yield plus
risk premium
method?
A. 14 percent
B. 13.2 percent
C. 12 percent
D. 13.95 percent
29. The net present value of an investment will be higher if
A. a firm uses straight-line depreciation.
B. the cost of the investment is lower.
C. the cost of capital is higher.
D. there's no salvage value.
30. The internal rate of return will be higher if the cost of
A. the investment is lower.
B. the investment is higher.
C. capital is lower.
D. capital is higher.
31. If the internal rates of return of two mutually exclusive
investments exceed the firm's
cost of capital,

13. the firm should make
A. neither investment.
B. both investments.
C. the investment with the lower IRR.
D. the investment with the higher IRR.
32. A firm has two investment opportunities. Each investment
costs $2,000, and the
firm's cost of capital is
8 percent. The cash flows of each investment are as follows:
Cash Flow of Investment A
Year 1: $1800
Year 2: $600
Year 3: $500
Year 4: $400
Cash Flow of Investment B
Year 1: $900
Year 2: $900
Year 3: $900
Year 4: $900

14. According to the information, the NPV for Investment B is
A. $1,600.
B. $3,600.
C. $2,980.
D. $980.
33.
Coupon rate = 7 percent
Average tax rate = 32%
Price of common stock = $80
Price of preferred stock = $50
Bond yield risk premium = 7%
Return of the market = 12%
Marginal tax rate = 35%
Common stock dividend (Do) = $6
Preferred stock dividend (Do) = $4
Growth rate of common stock dividend = 6%
Risk-free rate of return = 6%

15. Beta = 1.2
According to the information given, what is the cost of debt?
A. 4.55 percent
B. 7.0 percent
C. 6.25 percent
D. 2.45 percent
34.
Coupon rate = 7 percent
Average tax rate = 32%
Price of common stock = $80
Price of preferred stock = $50
Bond yield risk premium = 7%
Return of the market = 12%
Marginal tax rate = 35%
Common stock dividend (Do) = $6
Preferred stock dividend (Do) = $4
Growth rate of common stock dividend = 6%
Risk-free rate of return = 6%
Beta = 1.2

16. According to the information given, what is the cost of equity
using the expected growth
method?
A. 12 percent
B. 14.4 percent
C. 13.95 percent
D. 13.2 percent
35. A firm has two investment opportunities. Each investment
costs $2,000, and the
firm's cost of capital is
8 percent. The cash flows of each investment are as follows:
Cash Flow of Investment A
Year 1: $1800
Year 2: $600
Year 3: $500
Year 4: $400
Cash Flow of Investment B
Year 1: $900

17. Year 2: $900
Year 3: $900
Year 4: $900
According to the information, the NPV for Investment A is
A. $3,300.
B. $2,871.
C. $1,300.
D. $871.
36. Which of the following statements about the marginal cost
of capital is correct?
A. The marginal cost of capital declines as flotation costs alter
equity financing.
B. The marginal cost of capital is a firm's cost of debt and
equity finance.
C. The marginal cost of capital refers to the cost of additional
funds.
D. The marginal cost of capital is constant once the optimal
capital structure is determined.
37. The lower the debt ratio, the
A. higher are the firm's total assets.
B. lower are the firm's total assets.
C. lower is the use of financial leverage.

18. D. higher is the use of financial leverage.
38.
Coupon rate = 7 percent
Average tax rate = 32%
Price of common stock = $80
Price of preferred stock = $50
Bond yield risk premium = 7%
Return of the market = 12%
Marginal tax rate = 35%
Common stock dividend (Do) = $6
Preferred stock dividend (Do) = $4
Growth rate of common stock dividend = 6%
Risk-free rate of return = 6%
Beta = 1.2
According to the information given, what is the cost of equity
using the capital asset
pricing model?
A. 13.95 percent
B. 14.4 percent

19. C. 12 percent
D. 13.2 percent
39.
Coupon rate = 7 percent
Average tax rate = 32%
Price of common stock = $80
Price of preferred stock = $50
Bond yield risk premium = 7%
Return of the market = 12%
Marginal tax rate = 35%
Common stock dividend (Do) = $6
Preferred stock dividend (Do) = $4
Growth rate of common stock dividend = 6%
Risk-free rate of return = 6%
Beta = 1.2
According to the information given, what is the cost of
preferred stock?
A. 12 percent

20. B. 9 percent
C. 10 percent
D. 8 percent
40. An increase of cost of capital will
A. increase an investment's IRR.
B. decrease an investment's NPV.
C. decrease an investment's IRR.
D. Increase an investment's NPV.
Lab 3 – Radial Conduction Questions
1) Plot the temperature vs. radial distance for the steady state
temperature distributions.
a. How did you determine the system had reached steady state?
2) The disc is brass. Calculate the thermal conductivity (k)
using Fourier’s Law.
a. DO NOT use the probe in the center of the disc for this
calculation. That probe is not sampling the temperature of the
metal. (See Figures 1 and 2)
b. How does the calculated thermal conductivity (k) compare to
the actual conductivity of brass? Is there a difference? Why?
3) Show method of calculating k value. What assumptions are
you making? Do any unknowns interfere with your calculations?
Compare with the experimental data and comment on any
differences.
4) Determine the convection heat transfer coefficient of the
running cold water. (Use water temp as .) Does your answer
make sense? If not, why?
5) Plot a few of the transient temperature distributions and
comment on the manner in which the temperature changed over
the course of the experiment.

21. a. Did it change in the manner you expected?
6) Comment on any unusual findings or any other salient
information in the lab.
THE GEOMETRY OF THE DISC IS AS FOLLOWS:
Figure 1
Figure 2
· The inner radius of the disc is 4 mm. (See Figure 1)
· The outer radius of the disc is 55 mm. (See Figure 1)
· Notice in Figure 2 that probe #1 is in the center of the
apparatus.
· Each probe is separated by 10 mm. Probe 9 in Figure 2 sits 5
mm from edge of disc.
· Thickness of the disk is 3.2 mm - slightly larger than the lab
handout indicates
· The cooling water pipe is soldered to the disc. The water does
not make contact with the brass.
Sheet1time
(min)probe#1probe#2prob#3probe#7probe#8probe#9water
temp020.620.921.423.223.823.819.95120.921.422.124.124.824.
9wattage 22121.722.424.525.325.410.1
W321.121.822.624.725.525.7421.121.822.724.825.725.9521.121
.822.724.825.826621.121.822.624.825.82672121.722.524.825.8
26820.921.622.524.725.726920.821.422.424.625.7261020.721.4
22.2324.525.726