Question 1

The contribution margin is defined as the percent of each sales dollar that remains after satisfying fixed operating costs.

Accepted Answer

A) True 
 B)False  False

Question 2

Financial leverage results from the presence of variable financial costs in a firm's income stream.

Accepted Answer

A) True 
 B)False  False

Question 3

In case of a manufacturing organization,which of the following is a variable cost that varies directly with the sales volume?

Accepted Answer

A)  interest cost 
B)  dividend cost 
C)  shipping cost 
D)  rental cost 
A)  interest cost 
B)  dividend cost 
C)  shipping cost 
D)  rental cost C

Question 4

The degree of operating leverage will increase if a firm decides to compensate its sales representatives with a fixed salary and bonus rather than with a pure percent-of-sales commission.

Accepted Answer

A) True 
 B)False

Question 5

________ leverage is concerned with the relationship between earnings before interest and taxes and earnings per share.

Accepted Answer

A)  Financial 
B)  Operating 
C)  Variable 
D)  Total 
A)  Financial 
B)  Operating 
C)  Variable 
D)  Total

Question 6

________ is the potential use of fixed costs to magnify the effect of changes in sales on the firm's earnings per share.

Accepted Answer

A)  Investing leverage 
B)  Total leverage 
C)  Operating leverage 
D)  Financial leverage 
A)  Investing leverage 
B)  Total leverage 
C)  Operating leverage 
D)  Financial leverage

Question 7

________ is the potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes.

Accepted Answer

A)  Financial leverage 
B)  Operating leverage 
C)  Operating budget 
D)  Ratio analysis 
A)  Financial leverage 
B)  Operating leverage 
C)  Operating budget 
D)  Ratio analysis

Question 8

Which of the following is a fixed cost?

Accepted Answer

A)  inventory 
B)  rent 
C)  delivery costs 
D)  direct labor 
A)  inventory 
B)  rent 
C)  delivery costs 
D)  direct labor

Question 9

A firm has fixed operating costs of $25,000,a per unit sales price of $5,and a variable cost per unit of $3.What is its operating breakeven point if it targets net operating income of $10,000?

Accepted Answer

A)  12,500 units 
B)  15,000 units 
C)  17,500 units 
D)  25,000 units 
A)  12,500 units 
B)  15,000 units 
C)  17,500 units 
D)  25,000 units

Question 10

Operating leverage may be defined as the potential use of fixed operating costs to magnify the effects of changes in sales on a firm's earnings before interest and taxes (EBIT).

Accepted Answer

A) True 
 B)False

Question 11

________ is 100 percent minus total variable operating costs as a percentage of total sales.

Accepted Answer

A)  Profit margin 
B)  Contribution margin 
C)  Expense ratio 
D)  Fixed coverage ratio 
A)  Profit margin 
B)  Contribution margin 
C)  Expense ratio 
D)  Fixed coverage ratio

Question 12

A firm is analyzing two possible capital structures-30 and 50 percent debt ratios.The firm has total assets of $5,000,000 and common stock valued at $50 per share.The firm has a marginal tax rate of 40 percent on ordinary income.If the interest rate on debt is 7 percent and 9 percent for the 30 percent and the 50 percent debt ratios,respectively,the amount of interest on the debt under each of the capital structures being considered would be ________.

Accepted Answer

A)  30 percent debt ratio: $105,000 and 50 percent debt ratio: $225,000 
B)  30 percent debt ratio: $245,000 and 50 percent debt ratio: $225,000 
C)  30 percent debt ratio: $105,000 and 50 percent debt ratio: $250,000 
D)  30 percent debt ratio: $135,000 and 50 percent debt ratio: $175,000 
A)  30 percent debt ratio: $105,000 and 50 percent debt ratio: $225,000 
B)  30 percent debt ratio: $245,000 and 50 percent debt ratio: $225,000 
C)  30 percent debt ratio: $105,000 and 50 percent debt ratio: $250,000 
D)  30 percent debt ratio: $135,000 and 50 percent debt ratio: $175,000

Question 13

While operating leverage results only in a magnification of returns,financial leverage results only in a magnification of risk.

Accepted Answer

A) True 
 B)False

Question 14

The EBIT-EPS approach to capital structure involves selecting the capital structure that maximizes earnings before interest and taxes (EBIT)over the expected range of earnings per share (EPS).

Accepted Answer

A) True 
 B)False

Question 15

Operating leverage results from the existence of operating costs in a firm's income stream.

Accepted Answer

A) True 
 B)False

Question 16

Holding all other factors constant,a firm that is subject to a greater level of business risk should employ less total leverage than an otherwise equivalent firm that is subject to a lesser level of business risk.

Accepted Answer

A) True 
 B)False

Question 17

A firm's operating breakeven point is the point at which ________.

Accepted Answer

A)  total operating costs equal total fixed costs 
B)  total operating costs are zero 
C)  EBIT is less than sales 
D)  EBIT is zero 
A)  total operating costs equal total fixed costs 
B)  total operating costs are zero 
C)  EBIT is less than sales 
D)  EBIT is zero

Question 18

One of the limitations of breakeven analysis is its short-term time horizon.A large outlay in the current financial period could significantly raise the firm's breakeven point,while the benefits may occur over a period of years.

Accepted Answer

A) True 
 B)False

Question 19

A firm has a current capital structure consisting of $400,000 of 12 percent annual interest debt and 50,000 shares of common stock.The firm's tax rate is 40 percent on ordinary income.If the EBIT is expected to be $200,000,two EBIT-EPS coordinates for the firm's existing capital structure are ________.

Accepted Answer

A)  ($36,000, $0) and ($200,000, $3.04) 
B)  ($48,000, $0) and ($200,000, $1.82) 
C)  ($0, $48,000) and ($200,000, $1.82) 
D)  ($152,000, $3.50) and ($150,000, $1.82) 
A)  ($36,000, $0) and ($200,000, $3.04) 
B)  ($48,000, $0) and ($200,000, $1.82) 
C)  ($0, $48,000) and ($200,000, $1.82) 
D)  ($152,000, $3.50) and ($150,000, $1.82)

Question 20

________ leverage is concerned with the relationship between sales revenues and earnings before interest and taxes.

Accepted Answer

A)  Investing 
B)  Operating 
C)  Variable 
D)  Total 
A)  Investing 
B)  Operating 
C)  Variable 
D)  Total

The contribution margin is defined as the percent of each sales dollar that remains after satisfying fixed operating costs.

Financial leverage results from the presence of variable financial costs in a firm's income stream.

In case of a manufacturing organization,which of the following is a variable cost that varies directly with the sales volume?

The degree of operating leverage will increase if a firm decides to compensate its sales representatives with a fixed salary and bonus rather than with a pure percent-of-sales commission.

________ leverage is concerned with the relationship between earnings before interest and taxes and earnings per share.

________ is the potential use of fixed costs to magnify the effect of changes in sales on the firm's earnings per share.

________ is the potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes.

Which of the following is a fixed cost?

A firm has fixed operating costs of $25,000,a per unit sales price of $5,and a variable cost per unit of $3.What is its operating breakeven point if it targets net operating income of $10,000?

Operating leverage may be defined as the potential use of fixed operating costs to magnify the effects of changes in sales on a firm's earnings before interest and taxes (EBIT).

________ is 100 percent minus total variable operating costs as a percentage of total sales.

While operating leverage results only in a magnification of returns,financial leverage results only in a magnification of risk.

The EBIT-EPS approach to capital structure involves selecting the capital structure that maximizes earnings before interest and taxes (EBIT)over the expected range of earnings per share (EPS).

Operating leverage results from the existence of operating costs in a firm's income stream.

Holding all other factors constant,a firm that is subject to a greater level of business risk should employ less total leverage than an otherwise equivalent firm that is subject to a lesser level of business risk.

A firm's operating breakeven point is the point at which ________.

One of the limitations of breakeven analysis is its short-term time horizon.A large outlay in the current financial period could significantly raise the firm's breakeven point,while the benefits may occur over a period of years.

________ leverage is concerned with the relationship between sales revenues and earnings before interest and taxes.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Techniques

Capital Budgeting Cash Flows and Risk Refinements

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Filters

Exam 12: Leverage and Capital Structure

The contribution margin is defined as the percent of each sales dollar that remains after satisfying fixed operating costs.

Financial leverage results from the presence of variable financial costs in a firm's income stream.

In case of a manufacturing organization,which of the following is a variable cost that varies directly with the sales volume?

The degree of operating leverage will increase if a firm decides to compensate its sales representatives with a fixed salary and bonus rather than with a pure percent-of-sales commission.

________ leverage is concerned with the relationship between earnings before interest and taxes and earnings per share.

________ is the potential use of fixed costs to magnify the effect of changes in sales on the firm's earnings per share.

________ is the potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes.

Which of the following is a fixed cost?

A firm has fixed operating costs of $25,000,a per unit sales price of $5,and a variable cost per unit of $3.What is its operating breakeven point if it targets net operating income of $10,000?

Operating leverage may be defined as the potential use of fixed operating costs to magnify the effects of changes in sales on a firm's earnings before interest and taxes (EBIT).

________ is 100 percent minus total variable operating costs as a percentage of total sales.

While operating leverage results only in a magnification of returns,financial leverage results only in a magnification of risk.

The EBIT-EPS approach to capital structure involves selecting the capital structure that maximizes earnings before interest and taxes (EBIT)over the expected range of earnings per share (EPS).

Operating leverage results from the existence of operating costs in a firm's income stream.

Holding all other factors constant,a firm that is subject to a greater level of business risk should employ less total leverage than an otherwise equivalent firm that is subject to a lesser level of business risk.

A firm's operating breakeven point is the point at which ________.

One of the limitations of breakeven analysis is its short-term time horizon.A large outlay in the current financial period could significantly raise the firm's breakeven point,while the benefits may occur over a period of years.

________ leverage is concerned with the relationship between sales revenues and earnings before interest and taxes.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Techniques

Capital Budgeting Cash Flows and Risk Refinements

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Filters