Exam 5: Operating and Financial Leverage

A highly automated plant would generally have:

A conservative financing plan involves:

If fixed costs rise while other variables stay constant:

Operating Leverage is the use of fixed costs to magnify returns at high levels of operation.

If the price per unit decreases because of competition but the cost structure remains the same:

Heister Corporation produces class rings to sell to college and high school students. These rings sell for $75 each, and cost $35 each to produce. Heister has fixed costs of $50,000. A) Calculate Heister's break-even point. B) How much profit (loss) will Heister have if it sells 1,000 rings? 8,000 rings? C) Heister's president, J. R. D'Angelo, expects an annual profit of $100,000. How many rings must be sold to attain this profit?

Operating leverage is concerned with the use of capital assets in the business.

For firms in industries that offer some degree of stability, are in a positive stage of growth, and are operating in favourable economic conditions, the use of debt is not needed or recommended.

Which of the following is true about the concept of leverage?

-This firm's break-even point is:

If EBIT equals $280,000 and interest equals $20,000, with a tax rate of 31%, what is the degree of financial leverage?

If economic conditions were expected to be favourable, an investor would likely prefer a firm with a low degree of leverage.

A firm with a high degree of financial leverage could face financial difficulty even though it is in a stable industry.

A plant relying mostly on manual labour would generally have:

In break-even analysis the contribution margin is defined as:

If sales volume is less than the break-even point, the firm will experience:

A firm's indifference point between debt and equity financing plans would occur when the:

For Japanese firms that have high levels of operating and financial leverage, maintaining sales volume is of critical importance even at the cost of price cuts.

-The Degree of Operating Leverage (DOL) is:

Doug Robinson is considering the possibility of opening his own manufacturing facility. He expects first-year sales to be $800,000, and he feels that his variable costs will be approximately 40% of sales. His fixed costs in the first year will be $200,000. Doug is considering two ways of financing the firm: (a) 40% equity financing and 60% debt at 10%, or (b) 100% equity financing. He can sell common stock to his relatives for $10 per share. Either way, he will need to raise $1,000,000. Compute his break-even point in dollars.