Exam 5: Operating and Financial Leverage

When a firm employs no debt:

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

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

If the business cycle were just beginning its upswing,which firm would you anticipate would be likely to show the best growth in EPS over the next year? Firm A has high combined leverage and Firm B has low combined leverage.

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

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

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

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

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.

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

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

The degree of operating leverage is computed as:

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

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:

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

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

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.

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

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