Ch.5 HW Questions PT 2

A firm's break-even point will rise if Multiple Choice a. fixed costs decrease. b. contribution margin increases. c. sales price per unit rises. d. variable cost per unit rises

variables cost per unit rises

If fixed costs rise a. the break-even point rises. b. the degree of operating leverage increases. c. total profit declines. d. All of the options are true.

d. All of the options are true.

Which of the following is true about the concept of leverage? Multiple Choice a. At the break-even point, operating leverage is equal to zero. b. Combined leverage measures the impact of operating and financial leverage on EBIT. c. Financial leverage measures the impact of fixed costs on earnings. d. None of the options are true.

d. None of the options are true.

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

d. the cost of borrowed funds equals the return on assets.

Heavy use of long-term debt may be beneficial in an inflationary economy because Multiple Choice a. the debt may be repaid in more "expensive" dollars. b. nominal interest rates exceed real interest rates. c. inflation is associated with the peak of a business cycle. d. the debt may be repaid in "cheaper" dollars.

d. the debt may be repaid in "cheaper" dollars.

Firm A produces semiconductors using highly technical machinery; Firm B is a retail clothing store with little use of machinery. Consider which firm employs a higher degree of operating leverage and then answer the following question: "Which of the following comparative statements about firms A and B is true?" Multiple Choice A. ) A has a lower break-even point than B, but A's profit grows faster after the breakeven. B.) A has a higher break-even point than B, but A's profit grows slower after the breakeven. C.) B has a lower break-even point than A, but A's profit grows faster after the breakeven. D.) B has a lower break-even point than A, and profit grows at the same rate for both companies after the break-even point.

C.) B has a lower break-even point than A, but A's profit grows faster after the breakeven.

A weakness of break-even analysis is that it assumes Multiple Choice a. revenue and costs are a linear (constant) function of volume. b. sales prices and costs increase when the economy is strong and confidence is high. c. the cost of goods sold goes up as revenue increases. d. None of the options are true.

a. revenue and costs are a linear (constant) function of volume.

Under which of the following conditions could the overuse of financial leverage be detrimental to the firm? Multiple Choice 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. When there is cyclical demand for the firm's products.

Combined leverage is concerned with the relationship between Multiple Choice a. changes in EBIT and changes in EPS. b. changes in volume and changes in EPS. c. changes in volume and changes in EBIT. d. changes in EBIT and changes in net income.

b. changes in volume and changes in EPS.

A highly automated plant would generally have a. more variable than fixed costs. b. more fixed than variable costs. c. all fixed costs. d. all variable costs.

b. more fixed than variable costs.

Financial leverage deals with a. the relationship of fixed and variable costs. b. the relationship of debt and equity in the capital structure. c. the entire income statement. d. the entire balance sheet.

b. the relationship of debt and equity in the capital structure.

Which of the following is not true about leverage? Multiple Choice a. Operating leverage influences the top half of the income statement, determining EBIT. b. Financial leverage deals with the bottom half of the income statement, determining EPS. c. Combined leverage utilizes the entire income statement, showing the impact of change in volume on EBIT. d. None of the options are correct.

c. Combined leverage utilizes the entire income statement, showing the impact of change in volume on EBIT.

Which of the following is concerned with the change in operating profit as a result of a change in unit volume? a. Financial leverage b. Break-even point c. Operating leverage d. Combined leverage

c. Operating leverage

The degree of financial leverage is concerned with the relationship between Multiple Choice 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.

c. changes in EBIT and changes in EPS.