Question 1

Financial leverage primarily affects the left-hand side of the balance sheet.

Accepted Answer

A) True 
 B)False

Question 2

Break even in dollars is calculated by dividing sales by the contribution margin in percentage terms.

Accepted Answer

A) True 
 B)False

Question 3

Financial leverage primarily affects the _________ while operating leverage primarily affects the __________.

Accepted Answer

A)  left-hand side of the balance sheet; the right-hand side of the balance sheet 
B)  right-hand side of the balance sheet; the upper part of the income statement 
C)  lower part of the income statement; the right-hand side of the balance sheet 
D)  the upper part of the income statement; the left-hand side of the balance sheet 
A)  left-hand side of the balance sheet; the right-hand side of the balance sheet 
B)  right-hand side of the balance sheet; the upper part of the income statement 
C)  lower part of the income statement; the right-hand side of the balance sheet 
D)  the upper part of the income statement; the left-hand side of the balance sheet

Question 4

If a firm has fixed costs of $30,000, a price of $4.00, and a break-even point of 15,000 units, the variable cost per unit is:

Accepted Answer

A)  $5.00. 
B)  $2.00. 
C)  $0.50. 
D)  $4.00. 
A)  $5.00. 
B)  $2.00. 
C)  $0.50. 
D)  $4.00.

Question 5

Financial leverage is concerned with the use of debt in the business.

Accepted Answer

A) True 
 B)False

Question 6

Lever Products (LP) is considering the elimination of a press machine. The new press machine should reduce depreciation expenses by $80,000 annually. If LP's total fixed costs were $420,000 last year, what would LP's new break-even point in units if the contribution margin is 3.75 per unit?

Accepted Answer

A)  68,000 units 
B)  90,667 units 
C)  100,800 units 
D)  50,667 units 
A)  68,000 units 
B)  90,667 units 
C)  100,800 units 
D)  50,667 units

Question 7

The degree of operating leverage may be defined as:

Accepted Answer

A)  the change in operating income divided by the change in unit volume. 
B)  Q (P + V
C)  divided by Q (P + V
C)  - FC. 
C)  S + TVC divided by S + TVC - FC. 
D)  S - TVC divided by S - TVC - FC. 
A)  the change in operating income divided by the change in unit volume. 
B)  Q (P + V
C)  divided by Q (P + V
C)  - FC. 
C)  S + TVC divided by S + TVC - FC. 
D)  S - TVC divided by S - TVC - FC.

Question 8

A high DOL means:

Accepted Answer

A)  there are high labour costs. 
B)  there is high debt. 
C)  there is a large amount of equity. 
D)  there are high fixed costs. 
A)  there are high labour costs. 
B)  there is high debt. 
C)  there is a large amount of equity. 
D)  there are high fixed costs.

Question 9

Financial leverage is concerned with the relation between:

Accepted Answer

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

Question 10

As the contribution margin rises, the break-even point goes down.

Accepted Answer

A) True 
 B)False

Question 11

A firm would be indifferent between financing plans when:

Accepted Answer

A)  debt is equal to equity. 
B)  return on assets equals return on equity. 
C)  the cost of borrowed funds equals the return on equity. 
D)  the cost of borrowed funds equals the return on assets. 
A)  debt is equal to equity. 
B)  return on assets equals return on equity. 
C)  the cost of borrowed funds equals the return on equity. 
D)  the cost of borrowed funds equals the return on assets.

Question 12

Explain the implications of your answers if the machine shop business is highly cyclical.

Accepted Answer

As the amount of lev

Question 13

-The Degree of Operating Leverage is:

Accepted Answer

A)  1.43x. 
B)  1.56x. 
C)  3.33x. 
D)  2.22x. 
A)  1.43x. 
B)  1.56x. 
C)  3.33x. 
D)  2.22x.

Question 14

The contribution margin is equal to price per unit minus total costs per unit.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is concerned with the change in operating profit as a result of a change in volume?

Accepted Answer

A)  Financial leverage 
B)  Break-even point 
C)  Operating leverage 
D)  Combined leverage 
A)  Financial leverage 
B)  Break-even point 
C)  Operating leverage 
D)  Combined leverage

Question 16

The degree of operating leverage is computed as:

Accepted Answer

A)  percent change in operating profit divided by percent change in net income. 
B)  percent change in volume divided by percent change in operating profit. 
C)  percent change in EPS divided by percent change in operating income. 
D)  percent change in operating income divided by percent change in volume. 
A)  percent change in operating profit divided by percent change in net income. 
B)  percent change in volume divided by percent change in operating profit. 
C)  percent change in EPS divided by percent change in operating income. 
D)  percent change in operating income divided by percent change in volume.

Question 17

ECG has a contribution margin of $196,000. If ECG earned $87,000 before taxes in the year, what is the firm's Degree of Combined Leverage?

Accepted Answer

A)  2.26x 
B)  1.27x 
C)  0.44x 
D)  1.29x 
A)  2.26x 
B)  1.27x 
C)  0.44x 
D)  1.29x

Question 18

Sales volumes lower than the break-even point result in a firm having ___________________.

Accepted Answer

A)  operating losses 
B)  operating profits 
C)  break even cash flows 
D)  a gain of potential leverage and bank financing 
A)  operating losses 
B)  operating profits 
C)  break even cash flows 
D)  a gain of potential leverage and bank financing

Question 19

Jim Wilson is considering the possibility of opening his own machine shop. He expects first-year sales to be $600,000, and he feels that his variable costs will be approximately 50% of sales. His fixed costs in the first year will be $250,000.
Jim is considering two ways of financing the firm: (a) 60% equity financing and 40% debt at 14%, or (b) 100% equity financing. He can sell common stock to his relatives for $10 per share. Either way, he will need to raise $800,000.
A) Compute his break-even point in dollars.
B) Calculate the Degree of Operating Leverage at the expected first-year sales volume.
C) Calculate the Degree of Financial Leverage and the Degree of Combined Leverage under each of the possible financing plans.
D) Explain the implications of your answers if the machine shop business is highly cyclical.

Accepted Answer

A)
 @#IMG-DLM& B) @#IMG-DLM& C) 60% Equity/40% Deb

Question 20

A firm with a high degree of combined leverage will, other things being equal, experience higher earnings in the expansionary part of the business cycle.

Accepted Answer

A) True 
 B)False

Financial leverage primarily affects the left-hand side of the balance sheet.

Break even in dollars is calculated by dividing sales by the contribution margin in percentage terms.

Financial leverage primarily affects the _ while operating leverage primarily affects the __.

If a firm has fixed costs of $30,000, a price of $4.00, and a break-even point of 15,000 units, the variable cost per unit is:

Financial leverage is concerned with the use of debt in the business.

Lever Products (LP) is considering the elimination of a press machine. The new press machine should reduce depreciation expenses by $80,000 annually. If LP's total fixed costs were $420,000 last year, what would LP's new break-even point in units if the contribution margin is 3.75 per unit?

The degree of operating leverage may be defined as:

A high DOL means:

Financial leverage is concerned with the relation between:

As the contribution margin rises, the break-even point goes down.

A firm would be indifferent between financing plans when:

Explain the implications of your answers if the machine shop business is highly cyclical.

-The Degree of Operating Leverage is:

The contribution margin is equal to price per unit minus total costs per unit.

Which of the following is concerned with the change in operating profit as a result of a change in volume?

The degree of operating leverage is computed as:

ECG has a contribution margin of $196,000. If ECG earned $87,000 before taxes in the year, what is the firm's Degree of Combined Leverage?

Sales volumes lower than the break-even point result in a firm having ___________________.

A firm with a high degree of combined leverage will, other things being equal, experience higher earnings in the expansionary part of the business cycle.

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

Filters

Exam 5: Operating and Financial Leverage

Financial leverage primarily affects the left-hand side of the balance sheet.

Break even in dollars is calculated by dividing sales by the contribution margin in percentage terms.

Financial leverage primarily affects the _________ while operating leverage primarily affects the __________.

If a firm has fixed costs of $30,000, a price of $4.00, and a break-even point of 15,000 units, the variable cost per unit is:

Financial leverage is concerned with the use of debt in the business.

Lever Products (LP) is considering the elimination of a press machine. The new press machine should reduce depreciation expenses by $80,000 annually. If LP's total fixed costs were $420,000 last year, what would LP's new break-even point in units if the contribution margin is 3.75 per unit?

The degree of operating leverage may be defined as:

A high DOL means:

Financial leverage is concerned with the relation between:

As the contribution margin rises, the break-even point goes down.

A firm would be indifferent between financing plans when:

Explain the implications of your answers if the machine shop business is highly cyclical.

-The Degree of Operating Leverage is:

The contribution margin is equal to price per unit minus total costs per unit.

Which of the following is concerned with the change in operating profit as a result of a change in volume?

The degree of operating leverage is computed as:

ECG has a contribution margin of $196,000. If ECG earned $87,000 before taxes in the year, what is the firm's Degree of Combined Leverage?

Sales volumes lower than the break-even point result in a firm having ___________________.

A firm with a high degree of combined leverage will, other things being equal, experience higher earnings in the expansionary part of the business cycle.

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

Filters

Financial leverage primarily affects the _ while operating leverage primarily affects the __.