63. Which of the following is true about the concept of leverage?
64. A weakness of break-even analysis is that it assumes
65. A high degree of operating leverage means
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66. Which of the following is concerned with the change in operating profit as a result of a change in unit
volume?
67. Cash break-even analysis
68. The degree of operating leverage may be defined as
69. Loretta &Niece’s fixed costs are $425,000, including $25,000 of depreciation expense. The price of
each unit sold is $120, and the variable cost per unit is $60. How many units must the firm sell to reach the
cash break-even point?
70. Conservatively leveraged Firm A and highly leveraged Firm B operate at the same level of earnings
before interest and taxes. Which firm has a higher change in volume?
71. The degree of operating leverage is computed as
72. Firm A employs a high degree of operating leverage; Firm B takes a more conservative approach.
Which of the following comparative statements about firms A and B is true?
73. Firms with a high degree of operating leverage are
74. Financial leverage deals with
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75. A conservative financing plan involves
76. A conservative financing plan involves
77. A firm’s earnings per share is not impacted by its financing plan at the point when
78. If EBIT equals $200,000 and interest equals $40,000, what is the degree of financial leverage?
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79. The degree of financial leverage is concerned with the relationship between
80. When a firm employs no debt
81. If a firm has the lowest possible degree of operating leverage and the lowest possible degree of
financial leverage, then
82. Combined leverage is concerned with the relationship between
83. Which of the following is not true about leverage?
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84. If the business cycle is just beginning its upswing, which firm would you anticipate would be likely to
show the best growth in EPS over the next year? Firm A has high combined leverage and Firm B has low
combined leverage.
85.
Refer to the table. The degree of operating leverage is _____.
86.
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.
Refer to the table. The degree of financial leverage is _____.
87..
Refer to the table. The degree of combined leverage is _____.
88.
Refer to the table. This firm’s break-even point in units is
89.
Refer to the table. The degree of operating leverage (DOL) is _____.
90.
.
Refer to the table. The degree of financial leverage (DFL) is _____.
91.
1.
Refer to the table. The degree of combined leverage (DCL) is _____.
92. Heavy use of long-term debt may be beneficial in an inflationary economy because
93. Under which of the following conditions could the overuse of financial leverage be detrimental to the
firm?
94. 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?”
95. A factory that relies on highly technical machinery may choose to reduce its overall leverage position by
96. If Tech Cor has fixed costs of $60,000, variable costs of $1.20/unit, a sales price/unit of $7, and
depreciation expense of $25,000, what is its cash breakeven in units?
97. Green Co. has total debt of $400,000, a cost to borrow funds of 6%, and an EBIT of $42,500. From a
financial perspective, Green Co. has profits at
05–24
Chapter 05 Test Bank – Static Summary
Category
# of Questions
AACSB: Analytical Thinking
86
AACSB: Reflective Thinking
11
Accessibility: Keyboard Navigation
80
Blooms: Analyze
5
Blooms: Apply
26
Blooms: Evaluate
8
Blooms: Remember
11
Blooms: Understand
47
Difficulty: Basic
24
Difficulty: Challenge
18
Difficulty: Intermediate
55
Gradable: automatic
97
Learning Objective: 05-01 Leverage represents the use of fixed cost items to magnify the firm’s
results.
11
Learning Objective: 05-02 Break-even analysis allows the firm to determine the magnitude of
operations necessary to avoid loss statement, the cash budget, and the pro forma balance sheet..
34
Learning Objective: 05-03 Operating leverage indicates the extent to which fixed assets (plant and
equipment) are utilized by the firm.
28
Learning Objective: 05-04 Financial leverage shows how much debt the firm employs in its capital
structure..
21
Learning Objective: 05-05 Combined leverage takes into account both the use of fixed assets and
debt.
12
Learning Objective: 05-06 By increasing leverage, the firm increases its profit potential, but also its
risk of failure.
11
Topic: Break-even analysis
31
Topic: Business and financial risk
5
Topic: Financial and operating leverage
61