Corporate Finance Part 1
1. Which of the following is an advantage of a corporation?
B. Dilution of ownership
C. Elimination of double taxation
D. Ease of formation
2. 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?
3. Which of the following is a correct statement about operating leverage?
A. Operating leverage results from use of fixed instead of variable cost.
B. Operating leverage is affected by the demand for the product.
C. Operating leverage is associated with less risk and more certainty.
D. Operating leverage results from using debt financing.
4. If a firm produces 50,000 widgets and sells each unit for $20.50, what is the total revenue generated by
5. If a firm substitutes fixed for variable costs, which of the following will occur?
A. The use of financial leverage will be increased.
B. The profits will always be higher.
C. The break-even level of output will be reduced.
D. The degree of operating leverage will be increased.
6. Which of the following is an advantage of the sole proprietorship?
A. Limited liability
B. Ease of formation
C. Joint ownership
D. Ease of transfer of ownership
7. Which of these situations offers the best rationale for organizing a business as a limited partnership?
A. 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.
B. Management needs to raise money through a stock offering, but does not want to relinquish control of the business to
C. You’re an entrepreneur and you want two others’ expertise, former business partners, to help execute your business plan.
D. Management rejects the idea of personally assuming liability for the business.
8. Which of the following statements about fixed costs is correct?
A. Fixed costs don’t change with the size of the firm.
B. Fixed costs are greater than variable costs.
C. Fixed costs are paid before variable costs.
D. Fixed costs don’t change with the level of output.
9. A product sells for $5 per unit. If fixed costs are $1,000 and variable costs are $2 per unit, what is the
degree of operating leverage at 2,000 units?
10. Which of the following events would be most likely to increase the quantity breakeven point, assuming
other factors remain constant?
A. Reduced marketplace competition enables LMN Corporation to raise its selling price for finance textbooks.
B. The city council has finally been persuaded: Your taxi business will pay lower water and sewer rates.
C. The pressure has subsided: The property owner, who rents space to your small manufacturing plant, has agreed to blacktop
the employee and customer parking lot.
D. XYZ Corp agrees to increase its sales-commissions paid to employees by 12 percent.
11. Airlines have a high degree of operating leverage because of
A. insufficient government regulation.
B. small fixed expenses.
C. a large use of debt financing.
D. a large investment in fixed assets.
12. 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. 50 units
C. 200 units
D. 100 units
13. Which of the following is a correct statement about corporate losses?
A. They are carried forward to future years.
B. They are carried back three years and then carried forward.
C. They are carried forward three years and then carried back.
D. They offset other sources of income in prior years.
14. If ABC, Inc. has $650,000 in sales and $230,000 in expenses, what are the firm’s earnings before
interest and taxes (EBIT)?
15. A union contract suggests that labor costs may be
D. a noncash expense.
16. Which of the following is a correct statement about fixed costs?
A. Fixed costs are paid before variable costs.
B. Fixed costs do not change with the size of the firm.
C. Fixed costs are greater than variable costs.
D. Fixed costs do not change with the level of output.
17. If investors want to limit financial risk and maximize their control of the business, which of the
following forms of business should they prefer?
A. Limited partnership
B. Sole proprietorship
C. S corporation
18. Which of the following situations would provide corporate management with the strongest rationale to
carry forward current-year losses?
A. Management projects taxable income to remain unchanged over the next five years.
B. Congress just passed a very popular bill that reduces marginal federal income tax rates.
C. Management projects pre-tax losses over the next two years, and possibly even four years into the future.
D. 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.
19. A firm does not obtain financial leverage by
A. issuing preferred stock.
B. borrowing from the bank.
C. issuing bonds.
D. issuing common stock.
20. Owners in which of the following forms of business have unlimited liability?
A. Sole proprietorships
C. S corporations
D. Limited partnerships
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