Question 1

The closer a firm is to its break-even point, the lower the degree of operating leverage it will be.

Accepted Answer

A) True 
 B)False

Question 2

The degree of operating leverage is computed as

Accepted Answer

A)   percent change in operating profit divided by percent change in net income.
B)   percent change in unit volume divided by percent change in operating profit.
C)   percent change in EPS divided by percent change in operating income.
D)   percent change in operating income divided by percent change in unit volume.

Question 3

A firm with a high degree of financial leverage could face financial difficulty even though it is in a stable industry.

Accepted Answer

A) True 
 B)False

Question 4

Contribution margin is equal to fixed costs minus variable costs.

Accepted Answer

A) True 
 B)False

Question 5

Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?

Accepted Answer

A)   In a stable industry.
B)   When there is cyclical demand for the firm's products.
C)   During an upswing in the business cycle.
D)   When there is low interest cost compared to return on assets. B

Question 6

The lower a firm's break-even point, the better for the firm.

Accepted Answer

A) True 
 B)False

Question 7

At the break-even point, a firm's profits are

Accepted Answer

A)   greater than zero.
B)   less than zero.
C)   equal to zero.
D)   Not enough information is given to determine.

Question 8

If a firm has fixed costs of $30,000, a variable cost per unit of $.75, and a break-even point of 5,000 units, the sales price per unit is _____.

Accepted Answer

A)   $2.50
B)   $6.75
C)   $4.00
D)   $4.50

Question 9

A high degree of operating leverage means

Accepted Answer

A)   there are high labor costs.
B)   there is high debt.
C)   there is a large amount of equity.
D)   there are high fixed costs. D

Question 10

Financial leverage emphasizes the impact of using debt in the business.

Accepted Answer

A) True 
 B)False

Question 11

A highly automated plant would generally have

Accepted Answer

A)   more variable than fixed costs.
B)   more fixed than variable costs.
C)   all fixed costs.
D)   all variable costs.

Question 12

Operating leverage determines how income from operations is to be divided between debt holders and stockholders.

Accepted Answer

A) True 
 B)False

Question 13

Green Co. has total debt of $400,000, a cost to borrow funds of 6%, and an EBIT of $42,500. From a financial perspective, Green Co. has profits at

Accepted Answer

A)   breaking even.
B)   lower than the breakeven point.
C)   higher than the break-even point.
D)   in need of new financing.

Question 14

If a firm with $49,000 in fixed costs breaks even on 7,000 units, how many units must the firm sell to earn $30,000 in operating profit?

Accepted Answer

A)   30,000 units
B)   11,286 units
C)   15,824 units
D)   There is not enough information to determine the unit sales required.

Question 15

The degree of financial leverage is concerned with the relationship between

Accepted Answer

A)   changes in volume and changes in EPS.
B)   changes in volume and changes in EBIT.
C)   changes in EBIT and changes in EPS.
D)   changes in EBIT and changes in operating income.

Question 16

If the business cycle is 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.

Accepted Answer

A)   Firm A
B)   Firm B
C)   Indifferent between the two
D)   It depends on how much financial leverage each firm has A

Question 17

A firm's earnings per share is not impacted by its financing plan at the point when

Accepted Answer

A)   debt is equal to equity.
B)   return on assets equals return on equity.
C)   the cost of borrowed funds equals the return on equity.
D)   the cost of borrowed funds equals the return on assets.

Question 18

Degree of operating leverage should be computed only over a profitable range of business operations.

Accepted Answer

A) True 
 B)False

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

If a firm has the lowest possible degree of operating leverage and the lowest possible degree of financial leverage, then

Accepted Answer

A)   DOL equals 1, and DFL equals 0.
B)   DOL equals 0, and DFL equals 1.
C)   DOL equals 1, and DFL equals 1.
D)   None of the options

Exam 5: Operating and Financial Leverage

The closer a firm is to its break-even point, the lower the degree of operating leverage it will be.

Correct AnswerverifiedShow Answer

The degree of operating leverage is computed as

Correct AnswerverifiedShow Answer

A firm with a high degree of financial leverage could face financial difficulty even though it is in a stable industry.

Correct AnswerverifiedShow Answer

Contribution margin is equal to fixed costs minus variable costs.

Correct AnswerverifiedShow Answer

Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?

Correct AnswerverifiedB

The lower a firm's break-even point, the better for the firm.

Correct AnswerverifiedShow Answer

At the break-even point, a firm's profits are

Correct AnswerverifiedShow Answer

If a firm has fixed costs of $30,000, a variable cost per unit of $.75, and a break-even point of 5,000 units, the sales price per unit is _____.

Correct AnswerverifiedShow Answer

A high degree of operating leverage means

Correct AnswerverifiedD

Financial leverage emphasizes the impact of using debt in the business.

Correct AnswerverifiedShow Answer

A highly automated plant would generally have

Correct AnswerverifiedShow Answer

Operating leverage determines how income from operations is to be divided between debt holders and stockholders.

Correct AnswerverifiedShow Answer

Green Co. has total debt of $400,000, a cost to borrow funds of 6%, and an EBIT of $42,500. From a financial perspective, Green Co. has profits at

Correct AnswerverifiedShow Answer

If a firm with $49,000 in fixed costs breaks even on 7,000 units, how many units must the firm sell to earn $30,000 in operating profit?

Correct AnswerverifiedShow Answer

The degree of financial leverage is concerned with the relationship between

Correct AnswerverifiedShow Answer

If the business cycle is 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.

Correct AnswerverifiedA

A firm's earnings per share is not impacted by its financing plan at the point when

Correct AnswerverifiedShow Answer

Degree of operating leverage should be computed only over a profitable range of business operations.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

If a firm has the lowest possible degree of operating leverage and the lowest possible degree of financial leverage, then

Correct AnswerverifiedShow Answer

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B

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D

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A

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