Question Details

The degree of operating leverage has which of the following characteristics 



 .	Which of the following statements is most correct?

a.	All else being equal, an increase in a firm's fixed costs will increase its degree of operating leverage.
b.	Firms that have large fixed costs and low variable costs have a higher degree of financial leverage than do firms with low fixed costs and high variable costs.
c.	If a firm's net income rises 10 percent every time its EBIT rises 10 percent, this implies the firm has no debt outstanding.
d.	None of the statements above is correct.
e.	Answers a and c are correct.


 .	The degree of operating leverage has which of the following characteristics ?

a.	The closer the firm is operating to breakeven quantity, the smaller the DOL.
b.	A change in quantity demanded will produce the same percentage change in EBIT as an identical change in price per unit of output, other things held constant.
c.	The DOL is not a fixed number for a given firm, but will depend upon the time zero values of the economic variables Q (Quantity), P (Price), and V (Volume).
d.	The DOL relates the change in net income to the change in net operating income.
e.	If the firm has no debt, the DOL will equal 1.

 .	Company D has a 50 percent debt ratio, whereas Company E has no debt financing.  The two companies have the same level of sales, and the same degree of operating leverage.  Which of the following statements is most correct?

a.	If sales increase 10 percent for both companies, then Company D will have a larger percentage increase in its net income.
b.	If sales increase 10 percent for both companies, then Company D will have a larger percentage increase in its operating income (EBIT).
c.	If EBIT increases 10 percent for both companies, then Company D- net income will rise by more than 10 percent, while Company E- net income will rise by less than 10 percent.
d.	Answers a and c are correct.
e.	None of the answers above is correct.	

 .	Which of the following is a key benefit of using the degree of leverage concept in financial analysis?

a.	It allows decision makers a relatively clear assessment of the consequences of alternative actions.
b.	It establishes the optimal capital structure for the firm.
c.	It shows how a given change in leverage will affect sales.
d.	All of the statements above.
e.	Only statements a and c above are correct.

 .	Maxvill Motors has annual sales of $15,000.  Its variable costs equal 60 percent of its sales, and its fixed costs equal $1,000.  If the company- sales increase 10 percent, what will be the percentage increase in the company- earnings before interest and taxes (EBIT) ?

a.	12%
b.	14%
c.	16%
d.	18%
e.	20%



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