1) As the quantity of products produced and sold increases and the total capital

Question

1) As the quantity of products produced and sold increases and the total capital investment remains the same, the fixed cost per unit of output:

increases

increases to a certian level and then decreases

decereases

remain constant

2)The breakeven model assumes that if sales increase by 10%, fixed costs will

remain unchanged

rise by 10%

rise by 20%

the breakeven model makes no assumptions about fixed costs and sales

3) the range of capital structures within which the firm should stayto maximize its value and minimize its marginal cost of capital is the firm's __ capital structure.

breakeven

maximum

minimum

target

4)the increased variability of earnings available to the firm's common stockholders and the increased probability of bakruptcy experienced by the firm's owners if financial leverage is employed are labeled.

buisness risk

operating risk

earning risk

financial risk

Explanation / Answer

QUESTION 1

As the quantity of products produced and sold increases and the total capital investment remains the same, the fixed cost per unit of output DECREASES. According to break even analysis, the fixed cost remains same for any number of units produced. So, if units produced and sold increases, fixed cost remains unchanged, but fixed cost/unit decreases (denominator increases)

QUESTION 2

The breakeven model assumes that if sales increase by 10%, fixed costs will REMAIN UNCHANGED. As explained in the above question, overall fixed cost remains same for the project and does not change.

QUESTION 3

The range of capital structures within which the firm should stayto maximize its value and minimize its marginal cost of capital is the firm's TARGET capital structure. The target capital structure, also known as the optimal capital structure is defined as the mix of debt, preferred stock and common equity that will optimize the company's stock price.

QUESTION 4

The increased variability of earnings available to the firm's common stockholders and the increased probability of bakruptcy experienced by the firm's owners if financial leverage is employed are labeled - FINANCIAL RISK. Financial risk encompasses the many different types of risks related to a company's capital structure, financing and the finance industry.

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