quiz 10: ch 14

Which of the following is not true with respect to operating leverage? a. Higher operating leverage insulates a firm from losses in bad times. b. Firms with higher operating leverage have a larger contribution from each sale, so they accumulate profits or losses faster as they move away from the breakeven point in sales. c. Increased operating leverage increases business risk. d. Virtually all firms have at least some operating leverage

a. Higher operating leverage insulates a firm from losses in bad times.

The degree of financial leverage is measured by relating the percentage change in earnings per share to the percentage change in: a. sales. b. EBIT. c. debt ratio. d. share price.

b. EBIT

Financial leverage increases a firm's ROE and EPS under which of the following circumstances? a. ROCE = cost of debt b. ROCE > after tax cost of debt c. ROCE < pretax cost of debt d. ROCE = cost of equity

b. ROCE > after tax cost of debt

Financial leverage amplifies relative changes in EBIT into larger relative changes in ROE and EPS, operating leverage amplifies: a. relative changes in EBIT into larger relative changes in sales revenue. b. relative changes in sales revenue into larger relative changes in EBIT. c. relative changes in sales revenue into larger relative changes in ROE and EPS. d. relative changes in ROE and EPS into larger relative changes in EBIT.

b. relative changes in sales revenue into larger relative changes in EBIT.

The breakeven point on a breakeven diagram is: a. the point where the fixed cost line and the revenue line intersect. b. the point where the total cost line and the revenue line intersect. c. the point where the total cost line intersects the horizontal axis. d. the point where the total cost line intersects the vertical axis.

b. the point where the total cost line and the revenue line intersect.

Which of the following is correct? a. Capital structure affects both financial leverage and operating leverage. b. Cost structure affects both financial leverage and operating leverage. c. Capital structure affects financial leverage and cost structure affects operating leverage. d. Capital structure affects operating leverage and cost structure affects financial leverage. e. None of the above is correct

c. Capital structure affects financial leverage and cost structure affects operating leverage.

Financial leverage is a direct function of the ratio of: a. net income to sales. b. EBIT to sales. c. interest expense to EBIT. d. net income to the number of shares of common stock.

c. interest expense to EBIT.

When the return on equity is equal to the return on capital employed: a. the return on borrowed money equals the cost of borrowing the money. b. the firm has optimized its financial leverage. c. the firm is unleveraged. d. All of the above

c. the firm is unleveraged.

The central issue in the study of leverage is: a. whether leverage affects stock price. b. whether an optimal capital structure exists that maximizes stock price. c. whether an optimal capital structure exists that minimizes the cost of capital. d. All of the above

d. All of the above

Financial leverage has the following effect on financial performance: a. during periods of reasonably good performance, leverage enhances results in terms of ROE and EPS. b. leverage adds variability to financial performance making the firm's stock a riskier investment. c. leverage always makes performance better and thereby increases stock price. d. Both a and b

d. Both a and b