Reading 32: Measures of Leverage

Which of the following best defines leverage in the context of corporate finance?

Business risk is best described as the combination of which two risks?

Uncertainty regarding the price and quantity of goods and services sold is known as:

Which factor directly contributes to a firm's operating risk?

Financial risk is the additional risk borne by:

The Degree of Operating Leverage (DOL) is calculated as the percentage change in operating income divided by:

A company sells 10,000 units at a price of 50 per unit. Variable costs are 30 per unit, and fixed costs are 100,000. What is the Degree of Operating Leverage (DOL)?

If a company has a Degree of Operating Leverage (DOL) of 3.0, a 5 percent increase in sales will result in what percentage increase in operating income?

Which of the following scenarios typically results in the highest Degree of Operating Leverage (DOL)?

The Degree of Financial Leverage (DFL) measures the sensitivity of:

A firm has Operating Earnings (EBIT) of 500,000 and an annual interest expense of 100,000. What is the Degree of Financial Leverage (DFL)?

If a company has a Degree of Financial Leverage (DFL) of 1.5, a 10 percent increase in EBIT will result in what percentage increase in earnings per share (EPS)?

Assuming a firm has positive fixed operating costs, if the firm has no interest expense, its Degree of Financial Leverage (DFL) will be:

The Degree of Total Leverage (DTL) is calculated as:

A firm has a DOL of 2.5 and a DFL of 2.0. What is the firm's Degree of Total Leverage (DTL)?

If a firm's DTL is 4.0, a 5 percent increase in sales is expected to result in what percentage increase in net income?

Use the following data: Sales = 200,000; Total Variable Costs = 100,000; Fixed Operating Costs = 50,000; Interest Expense = 10,000. What is the Degree of Total Leverage (DTL)?

The use of financial leverage generally has what effect on a firm's Return on Equity (ROE) when operating earnings are positive?

The breakeven quantity of sales is the level of sales where:

Which formula correctly calculates the breakeven quantity of sales?

The operating breakeven quantity of sales is the quantity at which:

A firm has fixed operating costs of 20,000, fixed financing costs of 5,000, a unit price of 10, and a variable cost per unit of 6. What is the breakeven quantity of sales?

Using the same data (Fixed Operating = 20,000; Fixed Financing = 5,000; Price = 10; Variable Cost = 6), what is the operating breakeven quantity?

Other things equal, a firm with greater total fixed costs will have:

Leverage magnifies the effects of changes in sales on:

The further a firm's sales are from its breakeven level of sales, the:

A firm has sales of 1,000,000, variable costs of 600,000, fixed operating costs of 200,000, and interest expense of 50,000. What is the Degree of Operating Leverage (DOL)?

Using the same data (Sales=1,000,000; VC=600,000; FC=200,000; Interest=50,000), what is the Degree of Financial Leverage (DFL)?

Using the same data (Sales=1,000,000; VC=600,000; FC=200,000; Interest=50,000), what is the Degree of Total Leverage (DTL)?

If a company has no fixed costs and no interest expense, its Degree of Total Leverage (DTL) will be:

Which of the following would DECREASE a firm's breakeven quantity of sales?

Which of the following represents the contribution margin?

If a firm has a DFL of 1.4, and EBIT increases by 5 percent, net income will increase by:

What happens to the Degree of Operating Leverage (DOL) as the level of sales increases significantly above the breakeven point?

Company A has high fixed costs and low variable costs. Company B has low fixed costs and high variable costs. If sales increase by the same percentage for both, which company will experience a larger percentage increase in EBIT?

Company X is financed with 100 percent equity. Company Y is financed with 50 percent equity and 50 percent debt. Assuming both have the same EBIT and tax rate, which company will have a more volatile Return on Equity (ROE) if EBIT fluctuates?

The denominator in the formula for the Degree of Total Leverage (DTL) is:

Which statement regarding the relationship between leverage and risk is most accurate?

A firm sells products for 20 each. Variable costs are 12 per unit. Fixed operating costs are 40,000. Interest is 10,000. If the firm sells 10,000 units, what is the DTL?

In the context of leverage, fixed costs such as building leases are classified as:

A firm has an operating breakeven quantity of 5,000 units. If fixed operating costs are 50,000 and the price per unit is 25, what is the variable cost per unit?

When calculating the Degree of Financial Leverage (DFL), the denominator is:

If a firm has a DOL of 2.0 and sales increase by 10 percent, EBIT will increase by:

Total variable costs are calculated as:

A firm has sales of 500,000, variable costs of 300,000, and fixed costs of 100,000. What is the DOL?

If fixed operating costs increase while price and variable costs remain constant, what happens to the operating breakeven quantity?

Which leverage metric is defined as the percentage change in net income divided by the percentage change in sales?

The margin of safety in financial terms often refers to how far sales can fall before:

A firm has earnings before interest and taxes of 200,000 and interest expense of 40,000. If EBIT increases by 20 percent, how much will net income increase?

When comparing two firms, the one with the higher proportion of debt in its capital structure will generally have: