1 Preferred shareholders’ claims on assets and income of a firm come _______ those
of creditors’ __________those of common shareholders.
a Before; and also before
b After; but before
c After; and also after
d Equal to; and equal to


Which of the following would appear as liability in the balance sheet of a
a The value of Bonds purchased for investment purposes
b The value of Bonds issued for raising capital
c The value of Stocks purchased for investment purposes
d None of the given options


Operating leverage may be defined as:
a The degree to which debt is used in financing the firm
b The difference between price and variable costs
c The extent to which capital assets and fixed costs are utilized
d The difference between fixed costs and the contribution margin


The ultimate ownership of the firm resides:
a With management
b With common shareholders
c With preferred shareholders
d With bondholders


Preferred shareholders:
a Play a primary role in the financing of the firm
b Have a subordinated claim to dividends
c Possess an ownership interest in the firm
d Normally have no vote on corporate issues


The cost of each component of a firm’s capital structure multiplied by its weight in
the capital structure is called the:
a Marginal cost of capital
b Cost of debt
c Weighted average cost of capital
d None of the above


The cost of new common stock (external equity) is generally higher than the cost
of retained earnings (internal equity) because of:
a Tax effects.
b Investors’ required returns.
c Flotation costs.
d Coupon payments


The mix of debt, preferred stock, and common equity with which the firm plans to
raise capital is called the:
a Financial risk.
b Operating leverage.
c Business risk.
d Target capital structure.


Which of the following can be a cause of a high basic business risk?
a High operating leverage
b Large changes in customers’ demand
c Uncertainty in input costs
d All of the above

10 Which of the following causes an increase in a company diversifiable risk?
a Issuance of bonds
b Issuance of common stocks
c Investing in short term money market securities
d Non of the given option