Operating and Financial Leverage

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Assess your learning about EBIT-EPS analysis, break-even point, operating leverage (business riks), financial leverage (trading on equity), and Total leverage (total risk).

Company X sells watches for $25 per watch. The fixed cost of this operation is $80,000, while the variable costs are $15 per watch. What is the breakeven point in number of watches?

1 point

2,000 watches

6,000 watches

3,200 watches

8,000 watches

Clear selection

A firm has a DFL of 3.5 at X dollars. What does this tell us about the firm?

1 point

If sales rise by 3.5% at the firm, then EBIT will rise by 1%.

If EBIT rises by 3.5% at the firm, then EPS will rise by 1%.

If sales rise by 1% at the firm, then EBIT will rise by 3.5%.

If EBIT rises by 1% at the firm, then EPS will rise by 3.5%.

Clear selection

Frank's Pasta Maker has fixed operating costs of $28,500. The company's one product sells for $60 per unit while variable operating costs are $45 per unit. At what quantity of sales are all fixed and variable operating costs covered?

1 point

475 units

1,634 units

467 units

1,900 units

Clear selection

Which of the following is true about financial leverage?

1 point

It is the use of fixed assets in the production process.

It indicates the percent change in earnings per share that will occur given a percentage change in sales.

It is the use of debt to increase the return on the investment made by the company's owners.

It is based on a company's entire cost structure.

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If a firm's earnings before interest and taxes is $12,000 and the company's interest expense is $9,000, the degree of financial leverage will be 4. What does this imply?

1 point

For a 10% change in earnings before interest and taxes, earnings per share will change by 40%.

For a 10% change in the degree of operating leverage, the degree of financing leverage will change by 40%.

For a 10% change in sales, earnings before interest and taxes will change by 40%.

None of the above.

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Which of the following costs would be considered a fixed cost?

1 point

Raw materials.

Depreciation.

Bad-debt losses.

Production labor.

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A firm's degree of total leverage (DTL) is equal to its degree of operating leverage its degree of financial leverage (DFL).

1 point

plus

minus

multiplied by

divided by

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EBIT is usually the same thing as:

1 point

funds provided by operations.

earnings before taxes.

net income.

operating profit.

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Higher operating leverage is related to the use of additional __________.

1 point

fixed costs

variable costs

debt financing

common equity financing

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______ leverage focuses on the top of the income statement, from sales to earnings before interest and tax. _____ leverage focuses on the bottom of the income statement, from earning before interest and tax to earnings per share.

1 point

financial, operating

total, financial

operating, financial

operating, total

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At the operating breakeven point, _____ equals zero.

1 point

variable operating costs

EBIT

earnings before taxes

fixed operating costs

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________ leverage is concerned with the relationship between a firm's sales revenue and earnings per share.

1 point

financial

total

increased

operating

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An increase in leverage does which of the following?

1 point

increase risk and decrease returns

increase risk and returns

decrease risk and increase returns

decrease risk and returns

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If the _____ increases, there will be a decrease in the breakeven point.

1 point

interest expense

variable operating cost per unit

selling price per unit

fixed operating cost

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A firm has a DOL of 3.5 at Q units. What does this tell us about the firm?

1 point

If sales rise by 3.5% at the firm, then EBIT will rise by 1%.

If EBIT rises by 3.5% at the firm, then EPS will rise by 1%.

If sales rise by 1% at the firm, then EBIT will rise by 3.5%.

If EBIT rises by 1% at the firm, then EPS will rise by 3.5%.

Clear selection

The probability that a firm will become bankrupt due to its inability to meet its obligations as they come due depends on

1 point

business risk

political risk

financial risk

both a and c

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