Fin 300 Ch. 13

Degree of operating leverage can best be defined as:

DOL = % change EBIT % change in Sales

Which of the following statements is false?

The breakeven point (units sold) is inversely related to the level of fixed costs.

Financing an automated plant with debt adds financial leverage to operating leverage and increases the __________ leverage by a multiplier effect.

combined

Leverage in a business is caused by the presence of:

fixed costs.

Financial leverage is caused by the presence of __________ and __________ the variability of ____________ for any change in operating income.

fixed financing costs; increases; net income

Whenever fixed costs are greater than zero, DOL is:

greater than 1

Firms with relatively low fixed operating costs and high variable operating costs can best be described as:

having a low degree of operating leverage

A leveraged buyout (LBO) has the immediate effect of:

increasing financial leverage.

Two advantages of using debt in the capital structure of a corporation from the shareholders' perspective are:

interest is tax deductible and the firm has the opportunity to leverage income to a higher level through the use of fixed cost debt.

As businesses increase the proportion of debt in the capital structure from zero to nearly one hundred percent debt, the WACC first declines through moderate uses of debt then increases after some minimum point. The minimum point of the WACC points to the debt/firm value ratio that:

maximizes the market value of the firm.

The financial manager's major financing decision is selecting the debt/equity mix that:

maximizes the value of the firm.

Firms with high fixed operating costs:

tend to have low variable costs

The greater the degree of operating leverage,

the higher the business risk.

The sales break-even point is defined as:

the level of sales that a firm must reach to cover total operating costs