If a Firm Uses Debt Financing (Debt Ratio = 0

Multiple Choice

If a firm uses debt financing (Debt ratio = 0.40) and sales change from the current level,which of the following statements is CORRECT?

A) The percentage change in operating income (EBIT) resulting from the change in sales will exceed the percentage change in net income.
B) The percentage change in EBIT will equal the percentage change in net income.
C) The percentage change in net income relative to the percentage change in sales (and in EBIT) will not depend on the interest rate paid on the debt.
D) The percentage change in operating income will be less than the percentage change in net income.
E) Since debt is used, the degree of operating leverage must be greater than 1.