Operating leverage may be defined as:
a. the degree to which debt is used in financing the firm
b. the difference between price and variable costs
c. the extent to which capital assets and fixed costs are utilized
d. the difference between fixed costs and the contribution margin
c. the extent to which capital assets and fixed costs are utilized
The conservative firm will utilize:
a. a high degree of operating leverage
b. a low degree of operating leverage
c. high fixed costs
d. a higher profit margin
b. a low degree of operating leverage
The more aggressive firm:
a. substitutes higher fixed costs for variable costs
b. substitutes lower fixed costs for variable costs
c. has lower potential profit above the break-even point
d. is normally more effectively managed
a. substitutes higher fixed costs for variable costs
If management of an aggressive firm is apprehensive about economic conditions:
a. a highly leveraged approach should be maintained
b. a conservative approach should be implemented
c. the use of leverage should be tailored to the desired level of risk
d. the attitude of the firm has no impact
b. a conservative approach should be implemented
Most break-even analysis:
a. is conducted on the basis of cash flows
b. is theoretical only and has little impact on the firm
c. excludes fixed costs
d. is done on the basis of accounting flows
d. is done on the basis of accounting flows
Degree of operating leverage may be defined as:
a. the extent to which the firm utilizes debt in its financing plan
b. the percent change in operating income/percent change in unit volume
c. the percent change in operating income/percent change in sales
d. the percent change in net income/percent change in unit volume
b. the percent change in operating income/percent change in unit volume
Financial leverage:
a. reflects the firm's commitment to fixed, financial assets
b. has no impact on the earning of the firm
c. reflects the amount of debt used in the capital structure of the firm
d. primarily affects the left side of the balance sheet
c. reflects the amount of debt used in the capital structure of the firm
The highly financially leverage firm will typically:
a. has a higher EPS figure than the conservative firm
b. has a lower EPS figure than the conservative firm
c. uses less debt than the conservative firm
d. will produce the same EPS figure as the conservative firm
a. has a higher EPS figure than the conservative firm
The degree of financial leverage may be defined as:
a. percent change in sales/percent change in volume
b. percent change in EPS/percent change in net income
c. percent change in EPS/percent change in EBIT
d. percent change in EPS/percent change in sales
c. percent change in EPS/percent change in EBIT
The degree of financial leverage for the conservative firm:
a. is higher than the DFL for the highly leveraged firm
b. is the same as the DFL for the highly leveraged firm
c. is lower than the DFL for the highly leveraged firm
d. cannot be compared to the DFL for the highly leveraged firm
c. is lower than the DFL for the highly leveraged firm
The indifference point identifies:
a. equality of impact on eps between two financing plans
b. equality of impact on EBIT between two financing plans
c. equality of impact on revenue between two financing plans
d. equality of impact on number of shares between two financing plans
a. equality of impact on eps between two financing plans
A higher degree of financial leverage may be desirable for:
a. a stable firm, with positive growth, under favorable economic conditions
b. an unstable firm operating in an uncertain environment
c. a stable firm operating in an uncertain environment
d. neither the stable nor unstable firm under any circumstances
a. a stable firm, with positive growth, under favorable economic conditions
Degree of combined leverage:
a. should be minimized by the financial manager
b. affects only balance sheet items
c. decreases the firm's operating profit
d. shows the impact of sales or volume changes on bottom line EPS
d. shows the impact of sales or volume changes on bottom line EPS
To enhance overall operating results, a firm should prudently use which of the following:
a. operating leverage
b. financial leverage
c. combined leverage
d. conservative leverage
c. combined leverage
break-even analysis:
A numerical and graphical technique that is used to determine at what point the firm will break even (Revenue 5 Cost). To compute the break-even point, we divide fixed costs by price minus variable cost per unit.
combined leverage:
The total or combined impact of operating and financial leverage.
contribution margin:
The contribution to fixed costs from each unit of sales. The margin may be computed as price minus variable cost per unit.
degree of combined leverage (DCL):
A measure of the total combined effect of operating and financial leverage on earnings per share. The percentage change in earnings per share is divided by the percentage change in sales at a given level of operation.
degree of financial leverage (DFL):
A measure of the impact of debt on the earnings capability of the firm. The percentage change in earnings per share is divided by the percentage change in earnings before interest and taxes at a given level of operation.
degree of operating leverage (DOL):
A measure of the impact of fixed costs on the operating earnings of the firm. The percentage change in operating income is divided by the percentage change in volume at a given level of operation.
EBIT/EPS indifference point:
The amount of operating earnings required for one financing plan to equal an alternative financing plan with respect to the impact on earnings per share.
financial leverage:
A measure of the amount of debt used in the capital structure of the firm.
fixed costs:
Costs that remain relatively constant regardless of the volume of operations. Examples are rent, amortization, property taxes, and executive salaries.
leverage:
The use of fixed-charge items with the intent of magnifying the potential returns to the firm.
leveraged buyout:
Existing management or an outsider makes an offer to "go private" by retiring all the shares of the company. The buying group borrows the necessary money, using the assets of the acquired firm as collateral. The buying group then repurchases all the shares and expects to retire the debt over time with the cash flow from operations or the sale of corporate assets.
nonlinear break-even analysis:
Break-even analysis based on the assumption that cost and revenue relationships to quantity may vary at different levels of operation. Most of our analysis is based on linear break-even analysis.
operating leverage:
A reflection of the extent to which capital assets and fixed costs are utilized in the business firm.
variable costs:
Costs that move directly with a change in volume. Examples are raw materials, factory labor, and sales commissions.
