Question 1

At the break-even point, a firm's profits are:

Accepted Answer

A)  greater than zero. 
B)  less than zero. 
C)  equal to zero. 
D)  not enough information to tell. 
A)  greater than zero. 
B)  less than zero. 
C)  equal to zero. 
D)  not enough information to tell. C

Question 2

Firm A employs a high degree of operating leverage; Firm B takes a more conservative approach. Which of the following comparative statements about firms A and B is true?

Accepted Answer

A)  A has a lower break-even point than B, but A's profit grows faster after the break-even. 
B)  A has a higher break-even point than B, but A's profit grows slower after the break-even. 
C)  B has a lower break-even point than A, but A's profit grows faster after the break-even. 
D)  B has a lower break-even point than A, and profit grows the same rate for both companies after the break-even point. 
A)  A has a lower break-even point than B, but A's profit grows faster after the break-even. 
B)  A has a higher break-even point than B, but A's profit grows slower after the break-even. 
C)  B has a lower break-even point than A, but A's profit grows faster after the break-even. 
D)  B has a lower break-even point than A, and profit grows the same rate for both companies after the break-even point. C

Question 3

Raw materials used in the manufacturing process are generally classified as fixed costs. In contrast, property taxes are classified as variable costs.

Accepted Answer

A) True 
 B)False  False

Question 4

Combined leverage is concerned with the relationship between:

Accepted Answer

A)  changes in EBIT and changes in EPS. 
B)  changes in volume and changes in EPS. 
C)  changes in volume and changes in EBIT. 
D)  changes in EBIT and changes in net income. 
A)  changes in EBIT and changes in EPS. 
B)  changes in volume and changes in EPS. 
C)  changes in volume and changes in EBIT. 
D)  changes in EBIT and changes in net income.

Question 5

The analysis of operating leverage assumes that relationships between revenues and costs are constant.

Accepted Answer

A) True 
 B)False

Question 6

From the following income statement for 20X5, calculate:
A) Degree of financial leverage
B) Degree of operating leverage
C) Degree of combined leverage

Accepted Answer

A) DFL = EBIT/EBT = $104,000/$

Question 7

Calculate the Degree of Operating Leverage at the expected first-year sales volume.

Accepted Answer

Degree of

Question 8

Operating leverage determines how income from operations is to be divided between debt holders and shareholders.

Accepted Answer

A) True 
 B)False

Question 9

Operating income is not the same thing as EBIT.

Accepted Answer

A) True 
 B)False

Question 10

Cash break-even analysis eliminates the amortization expense and other non-cash charges from capital costs.

Accepted Answer

A) True 
 B)False

Question 11

Nonlinear break-even analysis is the use of break-even analysis based on the assumption that cost and revenue relationships to quantity sold may vary at different levels of sales.

Accepted Answer

A) True 
 B)False

Question 12

The degree of financial leverage measures the percentage change in EPS for every 1 percent move in EBIT.

Accepted Answer

A) True 
 B)False

Question 13

If EBIT equals $140,000 and interest equals $21,000, with a tax rate of 31%, what is the degree of financial leverage?

Accepted Answer

A)  6.67x 
B)  5.67x 
C)  3.91x 
D)  1.18x 
A)  6.67x 
B)  5.67x 
C)  3.91x 
D)  1.18x

Question 14

The degree of operating leverage is a number indicating the relationship between the percentage changes in sales to the percentage change in earnings per share.

Accepted Answer

A) True 
 B)False

Question 15

If a firm has a 30% change in operating income, and its Degree of Operating Leverage is 3.63, what was its percentage change in unit volume, all other things considered?

Accepted Answer

A)  36.5% 
B)  12.52% 
C)  8.26% 
D)  360% 
A)  36.5% 
B)  12.52% 
C)  8.26% 
D)  360%

Question 16

When a firm employs no debt:

Accepted Answer

A)  it has a financial leverage of one. 
B)  it has a financial leverage of zero. 
C)  its operating leverage is equal to its financial leverage. 
D)  it will not be profitable. 
A)  it has a financial leverage of one. 
B)  it has a financial leverage of zero. 
C)  its operating leverage is equal to its financial leverage. 
D)  it will not be profitable.

Question 17

Financial leverage deals with:

Accepted Answer

A)  the relationship of fixed and variable costs. 
B)  the relationship of debt and equity in the capital structure. 
C)  the entire income statement. 
D)  the entire balance sheet. 
A)  the relationship of fixed and variable costs. 
B)  the relationship of debt and equity in the capital structure. 
C)  the entire income statement. 
D)  the entire balance sheet.

Question 18

-The Degree of Financial Leverage is:

Accepted Answer

A)  1.29x. 
B)  4.50x. 
C)  3.50x. 
D)  1.32x. 
A)  1.29x. 
B)  4.50x. 
C)  3.50x. 
D)  1.32x.

Question 19

Which of the following questions does break-even analysis not attempt to address?

Accepted Answer

A)  How much do changes in volume affect costs and profits? 
B)  At what point does the firm break even? 
C)  What is the most efficient level of capital assets to employ? 
D)  Percentage change in earnings per share. 
A)  How much do changes in volume affect costs and profits? 
B)  At what point does the firm break even? 
C)  What is the most efficient level of capital assets to employ? 
D)  Percentage change in earnings per share.

Question 20

The interwoven boundaries of banks and different trading companies in Japan make it easier to acquire credit in Japan than in Canada.

Accepted Answer

A) True 
 B)False

Exam 5: Operating and Financial Leverage

At the break-even point, a firm's profits are:

Firm A employs a high degree of operating leverage; Firm B takes a more conservative approach. Which of the following comparative statements about firms A and B is true?

Raw materials used in the manufacturing process are generally classified as fixed costs. In contrast, property taxes are classified as variable costs.

Combined leverage is concerned with the relationship between:

The analysis of operating leverage assumes that relationships between revenues and costs are constant.

From the following income statement for 20X5, calculate: A) Degree of financial leverage B) Degree of operating leverage C) Degree of combined leverage

Calculate the Degree of Operating Leverage at the expected first-year sales volume.

Operating leverage determines how income from operations is to be divided between debt holders and shareholders.

Operating income is not the same thing as EBIT.

Cash break-even analysis eliminates the amortization expense and other non-cash charges from capital costs.

Nonlinear break-even analysis is the use of break-even analysis based on the assumption that cost and revenue relationships to quantity sold may vary at different levels of sales.

The degree of financial leverage measures the percentage change in EPS for every 1 percent move in EBIT.

If EBIT equals $140,000 and interest equals $21,000, with a tax rate of 31%, what is the degree of financial leverage?

The degree of operating leverage is a number indicating the relationship between the percentage changes in sales to the percentage change in earnings per share.

If a firm has a 30% change in operating income, and its Degree of Operating Leverage is 3.63, what was its percentage change in unit volume, all other things considered?

When a firm employs no debt:

Financial leverage deals with:

-The Degree of Financial Leverage is:

Which of the following questions does break-even analysis not attempt to address?

The interwoven boundaries of banks and different trading companies in Japan make it easier to acquire credit in Japan than in Canada.

The Goals and Functions of Financial Management

Review of Accounting

Financial Analysis

Financial Forecasting

Working Capital and the Financing Decision

Current Asset Management

Sources of Short-Term Financing

The Time Value of Money

Valuation and Rates of Return

Cost of Capital

The Capital Budgeting Decision

Risk and Capital Budgeting

Capital Markets

Investment Underwriting

Long-Term Debt and Lease Financing

Common and Preferred Stock Financing

Dividend Policy and Retained Earnings

Derivative Securities

External Growth Through Mergers

International Financial Management

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