Question 1

The closer a firm is to its break-even point, the lower the degree of operating leverage will be.

Accepted Answer

A) True 
 B)False

Question 2

Firms with a high degree of operating leverage are:

Accepted Answer

A)  easily capable of surviving large changes in sales volume. 
B)  usually trading off lower levels of risk for higher profits. 
C)  significantly affected by changes in interest rates. 
D)  trading off higher fixed costs for lower per-unit variable costs. 
A)  easily capable of surviving large changes in sales volume. 
B)  usually trading off lower levels of risk for higher profits. 
C)  significantly affected by changes in interest rates. 
D)  trading off higher fixed costs for lower per-unit variable costs.

Question 3

The degree of combined leverage is the sum of the degree of operating leverage and the degree of financial leverage.

Accepted Answer

A) True 
 B)False

Question 4

If a firm has a break-even point of 20,000 units and the contribution margin on the firm's single product is $3.00 per unit and fixed costs are $60,000, what will the firm's net income be at sales of 30,000 units?

Accepted Answer

A)  $90,000 
B)  $30,000 
C)  $15,000 
D)  $45,000 
A)  $90,000 
B)  $30,000 
C)  $15,000 
D)  $45,000

Question 5

Greater leverage can be used by firms in periods of strong economic growth?

Accepted Answer

A) True 
 B)False

Question 6

Financial leverage is determined to a large extent by the firm's:

Accepted Answer

A)  working capital choice. 
B)  capital budgeting choice. 
C)  capital structure choice. 
D)  dividend policy choice. 
A)  working capital choice. 
B)  capital budgeting choice. 
C)  capital structure choice. 
D)  dividend policy choice.

Question 7

If a firm has fixed costs of $20,000, variable cost per unit of $0.50, and a break-even point of 5,000 units, the price is:

Accepted Answer

A)  $2.50. 
B)  $5.00. 
C)  $4.00. 
D)  $4.50. 
A)  $2.50. 
B)  $5.00. 
C)  $4.00. 
D)  $4.50.

Question 8

Calculate the Degree of Financial Leverage and the Degree of Combined Leverage under each of the possible financing plans.

Accepted Answer

40% Equity/60% Debt @#IMG-DLM& DCL = DOL

Question 9

Linear break-even analysis and operating leverage are only valid within a relevant range of production.

Accepted Answer

A) True 
 B)False

Question 10

-The Degree of Financial Leverage is:

Accepted Answer

A)  1.56x. 
B)  1.79x. 
C)  7.50x. 
D)  1.15x. 
A)  1.56x. 
B)  1.79x. 
C)  7.50x. 
D)  1.15x.

Question 11

Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?

Accepted Answer

A)  Stable industry. 
B)  Cyclical demand for the firm's products. 
C)  Upswing of business cycle. 
D)  Low interest cost compared to return on assets. 
A)  Stable industry. 
B)  Cyclical demand for the firm's products. 
C)  Upswing of business cycle. 
D)  Low interest cost compared to return on assets.

Question 12

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

Accepted Answer

A)  sales minus variable costs. 
B)  sales minus fixed costs. 
C)  fixed costs minus variable costs. 
D)  fixed costs minus amortization. 
A)  sales minus variable costs. 
B)  sales minus fixed costs. 
C)  fixed costs minus variable costs. 
D)  fixed costs minus amortization.

Question 13

Operating Leverage works best when volume is increasing.

Accepted Answer

A) True 
 B)False

Question 14

Heavy use of long-term debt may be beneficial in an inflationary economy because:

Accepted Answer

A)  the debt may be repaid in more "expensive" dollars. 
B)  nominal interest rates exceed real interest rates. 
C)  inflation is associated with the peak of a business cycle. 
D)  the debt may be repaid in "cheaper" dollars. 
A)  the debt may be repaid in more "expensive" dollars. 
B)  nominal interest rates exceed real interest rates. 
C)  inflation is associated with the peak of a business cycle. 
D)  the debt may be repaid in "cheaper" dollars.

Question 15

-The Degree of Financial Leverage (DFL) is:

Accepted Answer

A)  3.50x. 
B)  1.40x. 
C)  1.95x. 
D)  1.58x. 
A)  3.50x. 
B)  1.40x. 
C)  1.95x. 
D)  1.58x.

Question 16

A lower price for the firm's product will reduce the firm's break-even point.

Accepted Answer

A) True 
 B)False

Question 17

Firms with cyclical sales should employ a high degree of leverage.

Accepted Answer

A) True 
 B)False

Question 18

A weakness of break-even analysis is that it assumes:

Accepted Answer

A)  revenue and costs are a linear (constant) function of volume. 
B)  prices and costs increase when the economy is strong and confidence is high. 
C)  cost of goods sold goes up as revenue increase. 
D)  there is no weakness. 
A)  revenue and costs are a linear (constant) function of volume. 
B)  prices and costs increase when the economy is strong and confidence is high. 
C)  cost of goods sold goes up as revenue increase. 
D)  there is no weakness.

Question 19

If fixed costs decreases while other variables stay constant:

Accepted Answer

A)  the break-even point increases. 
B)  degree of operating leverage increases. 
C)  total profit decrease. 
D)  total profit increases. 
A)  the break-even point increases. 
B)  degree of operating leverage increases. 
C)  total profit decrease. 
D)  total profit increases.

Question 20

The degree of financial leverage is not influenced by the interest rate on debt, only the amount borrowed.

Accepted Answer

A) True 
 B)False

Exam 5: Operating and Financial Leverage

The closer a firm is to its break-even point, the lower the degree of operating leverage will be.

Firms with a high degree of operating leverage are:

The degree of combined leverage is the sum of the degree of operating leverage and the degree of financial leverage.

If a firm has a break-even point of 20,000 units and the contribution margin on the firm's single product is $3.00 per unit and fixed costs are $60,000, what will the firm's net income be at sales of 30,000 units?

Greater leverage can be used by firms in periods of strong economic growth?

Financial leverage is determined to a large extent by the firm's:

If a firm has fixed costs of $20,000, variable cost per unit of $0.50, and a break-even point of 5,000 units, the price is:

Calculate the Degree of Financial Leverage and the Degree of Combined Leverage under each of the possible financing plans.

Linear break-even analysis and operating leverage are only valid within a relevant range of production.

-The Degree of Financial Leverage is:

Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?

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

Operating Leverage works best when volume is increasing.

Heavy use of long-term debt may be beneficial in an inflationary economy because:

-The Degree of Financial Leverage (DFL) is:

A lower price for the firm's product will reduce the firm's break-even point.

Firms with cyclical sales should employ a high degree of leverage.

A weakness of break-even analysis is that it assumes:

If fixed costs decreases while other variables stay constant:

The degree of financial leverage is not influenced by the interest rate on debt, only the amount borrowed.

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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