HB 311 Ch 14 Quiz

Business risk, as defined in terms of variation in a firm's operating performance and measured by EBIT, would be effected by variation in all of the following, except: a. anticipated changes in federal regulations. b. business operations. c. expenses. d. revenues.

a

EBIT, earnings before interest and taxes, is also called: a. operating income. b. net income. c. financial income. d. revenue.

a

Financial leverage may benefit shareholders when the: a. return on capital employed is greater than the after tax cost of debt. b. return on equity is greater than the cost of debt. c. return on investments is less than the cost of capital. d. None of the above

a

The difference between fixed and variable costs is that: a. variable costs move up and down with changes in sales while fixed costs remain constant. b. variable costs are only found in factory operations while fixed costs occur only in expenses. c. fixed costs are the costs of fixed assets, everything else is a variable cost. d. Both a and b

a

Which of the following is true of the degree of total leverage? a. It is the product of the degree of financial leverage and the degree of operating leverage. b. It is the sum of the degree of financial leverage and the degree of operating leverage. c. It is the difference between the degree of financial leverage and the degree of operating leverage. d. It is the relative change in financial leverage with respect to the operational leverage.

a

A firm that employs a relatively large proportion of debt in its capital structure will have a relatively ____ degree of financial leverage. a. low b. high c. insignificant d. constant

b

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

Financial leverage involves substituting debt for equity in the firm's capital structure, operating leverage involves: a. substituting variable costs for fixed costs in the firm's cost structure. b. substituting fixed costs for variable costs in the firm's cost structure. c. increasing financial risk. d. None of the above

b

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 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

Which of the following is an overall measure of business performance? a. Interest coverage ratio b. ROE c. Debt to equity ratio d. Revenue

b

A DFL (degree of financial leverage) of 3.0 indicates that a 27% increase in EPS is the result of a(n) ____ increase in EBIT. a. 81% b. 3% c. 9% d. 6%

c

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

The combined impact of operating leverage and financial leverage on the firm's EPS is: a. additive. b. geometric. c. multiplicative. d. None of the above

c

The degree of total leverage is equal to the degree of ____ multiplied by the ____. a. operating leverage, variable cost ratio b. financial leverage, variable cost ratio c. operating leverage, degree of financial leverage d. operating leverage, fixed cost ratio

c

The process of evaluating a firm's operations to determine the minimum volume it must sell to avoid losing money is referred to as: a. operating leverage analysis. b. direct analysis of operations. c. breakeven analysis. d. cost, volume, and profit analysis.

c

The underlying reason that leverage may increase stock price is that under certain conditions: a. it increases risk, which in turn requires a larger return on equity. b. it improves performance measured in terms of EBIT and EPS. c. it improves performance measured in terms of ROE and EPS. d. it is cheaper to raise new debt than it is to raise new equity.

c

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

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

A firm that employs relatively large amounts of labor-saving equipment in its operations will have a relatively ____ degree of operating leverage. a. low b. constant c. insignificant d. high

d

Operating leverage involves the use of: a. equity and debt in equal proportions. b. market power. c. debt. d. fixed costs.

d

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

The term "financial leverage" originated from the notion that there is a multiplicative effect on financial performance measured at ____ when borrowed money is used to support the firm. a. return on assets b. return on equity c. earnings per share d. Both b and c

d

When fixed operating costs are incurred by the firm, a relative change in ____ is magnified into a larger relative change in earnings before interest and taxes. a. overhead expenses b. interest charges c. labor costs d. sales revenue

d

Which of the following is most correct? a. When the return on capital employed (ROCE) is less than the before tax cost of debt, a company can increase its ROE by trading out equity and into debt. b. When the return on capital employed (ROCE) is more than the before tax cost of debt, a company can increase its ROE by trading out equity and into debt. c. When the return on capital employed (ROCE) is less than the after tax cost of debt, a company can increase its ROE by trading out equity and into debt. d. When the return on capital employed (ROCE) is more than the after tax cost of debt, a company can increase its ROE by trading out equity and into debt.

d

Which of the following is true of financial leverage? a. It affects the sensitivity of net income to changes in sales. b. It arises from the use of debt financing. c. It is increased by an increase in operating leverage. d. a and b

d

A decrease in the level of a firm's interest expense (holding all other factors constant) would: a. increase operating leverage. b. decrease operating leverage. c. decrease financial leverage. d. have no impact on operating leverage. e. c and d

e