Question 1

Which of the following is TRUE of leverage?

Accepted Answer

A) It refers to the effects that operating and financial fixed costs have on the returns that shareholders earn. 
B) It is associated with risks which are out of the control of managers. 
C) It includes the effect of operating fixed costs on the returns of shareholders and not the financial fixed costs. 
D) It is used to evaluate the profitability associated with various levels of sales. 
A) It refers to the effects that operating and financial fixed costs have on the returns that shareholders earn. 
B) It is associated with risks which are out of the control of managers. 
C) It includes the effect of operating fixed costs on the returns of shareholders and not the financial fixed costs. 
D) It is used to evaluate the profitability associated with various levels of sales.

Question 2

The basic shortcoming of EBIT-EPS analysis is that this model focuses on the maximization of stock returns rather than on the maximization of share price.

Accepted Answer

A) True 
 B)False

Question 3

An increase in cost (fixed cost or variable cost)tends to increase the operating breakeven point,whereas an increase in the sales price per unit will decrease the operating breakeven point.

Accepted Answer

A) True 
 B)False

Question 4

The cost of equity increases with increasing financial leverage in order to compensate the stockholders for the higher degree of financial risk.

Accepted Answer

A) True 
 B)False

Question 5

Whenever the percentage change in EBIT resulting from a given percentage change in sales is greater than the percentage change in sales,operating leverage exists.

Accepted Answer

A) True 
 B)False

Question 6

A firm has fixed operating costs of $150,000,total sales of $1,500,000,and total variable costs of $1,275,000.The firm's operating breakeven point in dollars is ________.

Accepted Answer

A) $150,000 
B) $176,471 
C) $1,000,000 
D) $1,425,000 
A) $150,000 
B) $176,471 
C) $1,000,000 
D) $1,425,000

Question 7

One function of breakeven analysis is to ________.

Accepted Answer

A) determine the profit attributable to each stockholder 
B) evaluate the effect of leverage on a firm's risks and returns 
C) evaluate the profitability of various sales levels 
D) determine the amount of financing needed by the firm 
A) determine the profit attributable to each stockholder 
B) evaluate the effect of leverage on a firm's risks and returns 
C) evaluate the profitability of various sales levels 
D) determine the amount of financing needed by the firm

Question 8

Total leverage measures the effect of fixed costs on the relationship between ________.

Accepted Answer

A) sales and EBIT 
B) sales and EPS 
C) EBIT and EPS 
D) EBIT and dividend 
A) sales and EBIT 
B) sales and EPS 
C) EBIT and EPS 
D) EBIT and dividend

Question 9

Since the sales price per unit generally decreases with volume and the cost per unit generally increases with volume,the true breakeven point may be different from those obtained using linear revenue and cost functions as assumed in the breakeven analysis.

Accepted Answer

A) True 
 B)False

Question 10

Breakeven analysis is used by a firm to determine the level of operations necessary to cover all fixed operating costs and to evaluate the profitability associated with various levels of production.

Accepted Answer

A) True 
 B)False

Question 11

Breakeven analysis is used by a firm ________.

Accepted Answer

A) to determine the level of operations necessary to cover all fixed operating costs 
B) to determine the least cost of producing goods and services 
C) to evaluate the profitability associated with various levels of sales 
D) to determine the demand of a product 
A) to determine the level of operations necessary to cover all fixed operating costs 
B) to determine the least cost of producing goods and services 
C) to evaluate the profitability associated with various levels of sales 
D) to determine the demand of a product

Question 12

When considering the decision to shift a firm's cost structure away from variable costs toward more fixed costs,a financial manager must weigh the increased financial risk associated with greater operating leverage against the expected increase in returns.

Accepted Answer

A) True 
 B)False

Question 13

Total leverage exists whenever the percentage change in earnings per share (EPS)resulting from a given percentage change in sales is greater than the percentage change in sales.

Accepted Answer

A) True 
 B)False

Question 14

Operating leverage is present when a firm has fixed operating costs.

Accepted Answer

A) True 
 B)False

Question 15

The optimal capital structure is the one that balances ________.

Accepted Answer

A) return and risk factors in order to maximize profits 
B) return and risk factors in order to maximize earnings per share 
C) return and risk factors in order to maximize market value 
D) return and risk factors in order to maximize dividends 
A) return and risk factors in order to maximize profits 
B) return and risk factors in order to maximize earnings per share 
C) return and risk factors in order to maximize market value 
D) return and risk factors in order to maximize dividends

Question 16

A firm has fixed operating costs of $650,000,a sales price per unit of $20,and a variable cost per unit of $13.At a base sales level of 500,000 units,the firm's degree of operating leverage is ________.

Accepted Answer

A) 1.07 
B) 1.11 
C) 1.18 
D) 1.23 
A) 1.07 
B) 1.11 
C) 1.18 
D) 1.23

Question 17

Financial leverage may be defined as the potential use of variable financial costs to magnify the effects of changes in earnings before interest and taxes (EBIT)on a firm's earnings per share (EPS).

Accepted Answer

A) True 
 B)False

Question 18

According to the pecking order theory,which of the following is the order in which corporations use different financing sources to fund investment projects?

Accepted Answer

A) retained earnings,equity,debt 
B) retained earnings,debt,equity 
C) debt,retained earnings,equity 
D) equity,retained earnings,debt 
A) retained earnings,equity,debt 
B) retained earnings,debt,equity 
C) debt,retained earnings,equity 
D) equity,retained earnings,debt

Question 19

At the operating breakeven point,________ equals zero.

Accepted Answer

A) sales revenue 
B) fixed operating costs 
C) variable operating costs 
D) earnings before interest and taxes 
A) sales revenue 
B) fixed operating costs 
C) variable operating costs 
D) earnings before interest and taxes

Question 20

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

Which of the following is TRUE of leverage?

The basic shortcoming of EBIT-EPS analysis is that this model focuses on the maximization of stock returns rather than on the maximization of share price.

An increase in cost (fixed cost or variable cost)tends to increase the operating breakeven point,whereas an increase in the sales price per unit will decrease the operating breakeven point.

The cost of equity increases with increasing financial leverage in order to compensate the stockholders for the higher degree of financial risk.

Whenever the percentage change in EBIT resulting from a given percentage change in sales is greater than the percentage change in sales,operating leverage exists.

A firm has fixed operating costs of $150,000,total sales of $1,500,000,and total variable costs of $1,275,000.The firm's operating breakeven point in dollars is ________.

One function of breakeven analysis is to ________.

Total leverage measures the effect of fixed costs on the relationship between ________.

Since the sales price per unit generally decreases with volume and the cost per unit generally increases with volume,the true breakeven point may be different from those obtained using linear revenue and cost functions as assumed in the breakeven analysis.

Breakeven analysis is used by a firm to determine the level of operations necessary to cover all fixed operating costs and to evaluate the profitability associated with various levels of production.

Breakeven analysis is used by a firm ________.

When considering the decision to shift a firm's cost structure away from variable costs toward more fixed costs,a financial manager must weigh the increased financial risk associated with greater operating leverage against the expected increase in returns.

Total leverage exists whenever the percentage change in earnings per share (EPS)resulting from a given percentage change in sales is greater than the percentage change in sales.

Operating leverage is present when a firm has fixed operating costs.

The optimal capital structure is the one that balances ________.

A firm has fixed operating costs of $650,000,a sales price per unit of $20,and a variable cost per unit of $13.At a base sales level of 500,000 units,the firm's degree of operating leverage is ________.

Financial leverage may be defined as the potential use of variable financial costs to magnify the effects of changes in earnings before interest and taxes (EBIT)on a firm's earnings per share (EPS).

According to the pecking order theory,which of the following is the order in which corporations use different financing sources to fund investment projects?

At the operating breakeven point,________ equals zero.

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

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Long- and Short-Term 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

Which of the following is TRUE of leverage?

The basic shortcoming of EBIT-EPS analysis is that this model focuses on the maximization of stock returns rather than on the maximization of share price.

An increase in cost (fixed cost or variable cost)tends to increase the operating breakeven point,whereas an increase in the sales price per unit will decrease the operating breakeven point.

The cost of equity increases with increasing financial leverage in order to compensate the stockholders for the higher degree of financial risk.

Whenever the percentage change in EBIT resulting from a given percentage change in sales is greater than the percentage change in sales,operating leverage exists.

A firm has fixed operating costs of $150,000,total sales of $1,500,000,and total variable costs of $1,275,000.The firm's operating breakeven point in dollars is ________.

One function of breakeven analysis is to ________.

Total leverage measures the effect of fixed costs on the relationship between ________.

Since the sales price per unit generally decreases with volume and the cost per unit generally increases with volume,the true breakeven point may be different from those obtained using linear revenue and cost functions as assumed in the breakeven analysis.

Breakeven analysis is used by a firm to determine the level of operations necessary to cover all fixed operating costs and to evaluate the profitability associated with various levels of production.

Breakeven analysis is used by a firm ________.

When considering the decision to shift a firm's cost structure away from variable costs toward more fixed costs,a financial manager must weigh the increased financial risk associated with greater operating leverage against the expected increase in returns.

Total leverage exists whenever the percentage change in earnings per share (EPS)resulting from a given percentage change in sales is greater than the percentage change in sales.

Operating leverage is present when a firm has fixed operating costs.

The optimal capital structure is the one that balances ________.

A firm has fixed operating costs of $650,000,a sales price per unit of $20,and a variable cost per unit of $13.At a base sales level of 500,000 units,the firm's degree of operating leverage is ________.

Financial leverage may be defined as the potential use of variable financial costs to magnify the effects of changes in earnings before interest and taxes (EBIT)on a firm's earnings per share (EPS).

According to the pecking order theory,which of the following is the order in which corporations use different financing sources to fund investment projects?

At the operating breakeven point,________ equals zero.

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

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Long- and Short-Term 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