Exam 5: Operating and Financial Leverage

Conservatively leveraged Firm C and highly leveraged Firm H operate at the same level of earnings before interest and taxes where the return on assets is greater than the cost of debt.

The break-even point can be calculated as:

If the contribution margin on the firm's single product is $2.00 per unit and fixed costs are $60,000, what will the firm's net income be at sales of 30,000 units?

Leverage is a strategic choice made by management based on assessment of risk and potential positive cash flows and the availability of financing

-The Degree of Combined Leverage is:

If a firm has a price of $4.00, variable cost per unit of $2.50, and a break-even point of 20,000 units, fixed costs are equal to:

Which of the following is not true about leverage?

Heavy use of long-term debt may be detrimental in a deflationary economy because:

-The Degree of Combined Leverage (DCL) is:

-The Degree of Combined Leverage is:

Linear break-even analysis assumes that costs are linear functions of volume.

Operating leverage will change when a firm alters the mix of capital resources and labour that it uses.

Operating leverage primarily affects the __________ while financial leverage primarily affects the __________.

If a firm has a DFL of 2.0, EPS will change 2% for every 1% change in volume.

Operating leverage influences the bottom half of the income statement while financial leverage deals with the top half.

Cash break-even analysis:

The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation.

If sales volume exceeds the break-even point, the firm will experience:

Management should tailor the use of leverage to meet its own risk-taking desires.

Use of financial leverage must consider risk, not just maximizing profit.