Back to Subject
View Notes

Unit 4 - Practice Quiz

FIN212

1 Which of the following best defines return in a financial context?

A. The total loss incurred from an investment
B. The gain or loss of a security in a particular period
C. The fixed interest rate provided by a bank
D. The uncertainty associated with an investment

2 What is the formula for calculating the Holding Period Return (HPR) on a stock?

A.
B.
C.
D.

3 If you bought a share for 110, and received a dividend of $5, what is your percentage return?

A. 10%
B. 15%
C. 5%
D. 12%

4 Which statistical measure is most commonly used to quantify the total risk of a single asset?

A. Mode
B. Median
C. Standard Deviation
D. Correlation Coefficient

5 The Expected Return () of a single asset given various economic scenarios is calculated as:

A. The sum of all possible returns
B. The weighted average of possible returns, where weights are the probabilities of occurrence
C. The highest possible return minus the lowest possible return
D. The return with the highest probability only

6 An investment has a 50% chance of earning a 20% return and a 50% chance of earning a 10% return. What is the Expected Return?

A. 10%
B. 12.5%
C. 15%
D. 30%

7 Which coefficient measures the risk per unit of return, allowing for comparison between assets with different expected returns?

A. Beta
B. Correlation
C. Coefficient of Variation
D. Covariance

8 Risk that represents the portion of an asset's risk that can be eliminated through diversification is called:

A. Systematic Risk
B. Unsystematic Risk
C. Market Risk
D. Beta Risk

9 In financial management, Leverage generally refers to:

A. The use of equity to finance assets
B. The use of fixed-cost assets or funds to magnify returns to owners
C. Reducing the debt in the capital structure
D. Investing only in risk-free assets

10 Which type of leverage is associated with the relationship between Sales and EBIT (Earnings Before Interest and Taxes)?

A. Financial Leverage
B. Operating Leverage
C. Combined Leverage
D. Working Capital Leverage

11 What is the formula for Degree of Operating Leverage (DOL) at a specific level of sales?

A.
B.
C.
D.

12 If a firm has High Operating Leverage, it implies:

A. A small change in Sales will result in a large change in EBIT
B. A small change in Sales will result in a small change in EBIT
C. The firm has no fixed costs
D. The firm has very high variable costs compared to fixed costs

13 Calculate the Contribution if Sales are $100,000$ and Variable Costs are $40,000$.

A. $140,000$
B. $60,000$
C. $40,000$
D. $100,000$

14 A company has Sales of $200,000$, Variable Costs of $100,000$, and Fixed Operating Costs of $50,000$. What is the Degree of Operating Leverage (DOL)?

A. 1.5
B. 2.0
C. 2.5
D. 4.0

15 Financial Leverage arises due to the presence of:

A. Fixed operating costs
B. Variable costs
C. Fixed financial charges (Interest/Preference Dividend)
D. High inventory levels

16 The Degree of Financial Leverage (DFL) measures the sensitivity of:

A. EBIT to Sales
B. EPS to EBIT
C. Sales to Fixed Costs
D. Market Price to Book Value

17 What is the formula for Degree of Financial Leverage (DFL) assuming no preference capital?

A.
B.
C.
D.

18 If a company has EBIT of $100,000$ and Interest expenses of $20,000$, what is the DFL?

A. 1.25
B. 0.8
C. 5.0
D. 1.20

19 Combined Leverage (DCL) is calculated as:

A.
B.
C.
D.

20 Combined Leverage measures the relationship between changes in Sales and changes in:

A. EBIT
B. EBT
C. EPS
D. Operating Costs

21 Which of the following formulas represents the Degree of Combined Leverage (DCL)?

A.
B.
C.
D.

22 If DOL is 2.5 and DFL is 2.0, what is the Degree of Combined Leverage?

A. 4.5
B. 0.5
C. 5.0
D. 1.25

23 What is the Variance () of returns if the returns are 5%, 10%, and 15% with equal probability (Mean = 10%)?

A. 16.67
B. 25
C. 50
D. 12.5

24 Operating leverage is a measure of:

A. Business Risk
B. Financial Risk
C. Market Risk
D. Interest Rate Risk

25 Financial leverage is a measure of:

A. Business Risk
B. Financial Risk
C. Systematic Risk
D. Operational Risk

26 If a company has no debt and no preference shares, its Financial Leverage will be:

A.
B. 1
C. Infinite
D. Negative

27 A firm with high fixed operating costs and low variable costs is said to be:

A. Capital Intensive
B. Labor Intensive
C. Low Leverage
D. Risk Averse

28 Which of the following is true regarding Trading on Equity?

A. It refers to issuing more equity shares
B. It refers to using debt to increase the return to equity shareholders
C. It refers to trading shares on the stock exchange
D. It implies avoiding all debt

29 In the calculation of DFL, how is Preference Dividend (PD) treated if corporate tax rate is ?

A. Subtracted directly from EBIT
B. Ignored completely
C. Adjusted as and subtracted from EBIT in the denominator
D. Added to Interest

30 If Sales increase by 10% and EPS increases by 40%, what is the Degree of Combined Leverage (DCL)?

A. 0.25
B. 4.0
C. 3.0
D. 400

31 If the Break-even point is high, the Operating Leverage is generally:

A. Low
B. High
C. Zero
D. Unrelated

32 The percentage change in EBIT divided by the percentage change in Sales is the definition of:

A. DOL
B. DFL
C. DCL
D. ROI

33 If a stock price is 2, and the expected growth rate is 5%, what is the expected return using the Gordon Growth Model ()?

A. 4%
B. 5%
C. 9%
D. 10%

34 Which of the following reduces the Degree of Operating Leverage?

A. Increasing Fixed Costs
B. Increasing Variable Costs per unit
C. Increasing Sales price per unit
D. Reducing Sales volume

35 What indicates a favorable financial leverage?

A. ROI > Cost of Debt
B. ROI < Cost of Debt
C. ROI = Cost of Debt
D. EBIT is negative

36 In a probability distribution of returns, a "tight" distribution (peaked curve) implies:

A. High Risk
B. Low Risk
C. No Return
D. High Variance

37 Given: Contribution = $500,000$, Fixed Costs = $200,000$, Interest = $100,000$. Calculate DFL.

A. 1.5
B. 1.67
C. 2.5
D. 5.0

38 If a firm has a DOL of 3 and Sales increase by 5%, EBIT will increase by:

A. 5%
B. 3%
C. 15%
D. 8%

39 Systematic risk is measured by:

A. Standard Deviation
B. Variance
C. Beta ()
D. Range

40 If an asset's return moves in the exact opposite direction to the market return, the correlation coefficient is:

A. +1
B.
C. -1
D. 0.5

41 Company A has high operating leverage and Company B has low operating leverage. In an economic downturn (falling sales), which company will suffer a sharper decline in EBIT?

A. Company A
B. Company B
C. Both will be equal
D. Neither will suffer

42 The Indifference Point in financial management refers to the level of EBIT where:

A. EPS of two different financing plans are equal
B. Sales equal Variable Costs
C. Total Revenue equals Total Costs
D. The firm goes bankrupt

43 Calculation: Sales = $1,000$, VC = $600$, FC = $200$, Interest = $100$. Calculate DCL.

A. 2.0
B. 4.0
C. 2.5
D. 8.0

44 Why is debt interest considered a "tax shield"?

A. It is not taxable
B. It is tax-deductible, reducing taxable income
C. It increases the tax rate
D. It is paid after tax

45 Real Return differs from Nominal Return because Real Return adjusts for:

A. Risk
B. Inflation
C. Taxes
D. Dividends

46 If Probability and . What is the variance?

A. 16
B. 24
C. 4.9
D. 20

47 Which leverage explains the relationship between % change in EBT and % change in EBIT?

A. Operating Leverage
B. Financial Leverage
C. Combined Leverage
D. Total Leverage

48 A firm has a negative DFL. This implies:

A. The firm has no debt
B. EBIT is less than the Interest expense
C. Sales are zero
D. Tax rate is negative

49 Which of the following is NOT required to calculate Operating Leverage?

A. Sales Revenue
B. Variable Costs
C. Interest Expense
D. Fixed Operating Costs

50 Total Risk of a firm is composed of:

A. Market Risk + Interest Risk
B. Business Risk + Financial Risk
C. Operating Risk + Sales Risk
D. Internal Risk + External Risk