Question Details

The use of financial leverage by the firm has a potential impact on which of the following 



 .	Which of the following statements is most correct?

a.	An increase in fixed costs, (holding sales and variable costs constant) will reduce the company- degree of operating leverage.
b.	An increase in interest expense will reduce the company- degree of financial leverage.
c.	If the company has no debt outstanding, then its degree of total leverage equals its degree of operating leverage.
d.	Answers a and b are correct.
e.	Answers b and c are correct.

 .	The use of financial leverage by the firm has a potential impact on which of the following ?

(1)  The risk associated with the firm.
(2)  The return experienced by the shareholder.
(3)  The variability of net income.
(4)  The degree of operating leverage.
(5)  The degree of financial leverage.

a.	1, 3, 5
b.	1, 2, 5
c.	2, 3, 5
d.	2, 3, 4, 5
e.	1, 2, 3, 5

 .	If a firm uses debt financing (Debt ratio = 0.40) and sales change from the current level, which of the following statements is most correct?

a.	The percentage change in net operating income (EBIT) resulting from the change in sales will exceed the percentage change in net income (NI).
b.	The percentage change in EBIT will equal the percentage change in net income.
c.	The percentage change in net income relative to the percentage change in sales (and in EBIT) will not depend on the interest rate paid on the debt.
d.	The percentage change in net operating income will be less than the percentage change in net income.
e.	Since debt is used, the degree of operating leverage must be greater than 1.
 .	Which of the following statements is most correct?

a.	Suppose Company A's EPS is expected to experience a larger percentage change in response to a given percentage change in sales than Company B's EPS.  Other things held constant, Company A would appear to have more business risk than Company B.
b.	Statement a would be correct if the term “EBIT” were substituted for “EPS.”
c.	Statement a would be correct if the term “EBIT” were substituted for “sales.”
d.	Statement a would be correct if the words “financial risk” were substituted for “business risk.”
e.	The statements above are false.

 .	Which of the following statements is most correct?

a.	The degree of operating leverage (DOL) depends on a company's fixed costs, variable costs, and sales.  The DOL formula assumes (1) that fixed costs are constant and (2) that variable costs are a constant proportion of sales.
b.	The degree of total leverage (DTL) is equal to the DOL plus the degree of financial leverage (DFL).
c.	Arithmetically, financial leverage and operating leverage offset one another so as to keep the degree of total leverage constant.  Therefore, the formula shows that the greater the degree of financial leverage, the smaller the degree of operating leverage.
d.	The statements above are true.
e.	The statements above are false.




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