Test Bank Quiz for Chap 005 PDF

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Test Bank Quiz preparation for Chapter 05...

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Chapter 05 - Operating and Financial Leverage

Chapter 05 Operating and Financial Leverage

Multiple Choice Questions 1. The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation. A. fixed costs B. variable costs C. marginal costs D. semi-variable costs

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 05-02 Calculate break-even in units and in dollars. Topic: 05-01 Leverage in a Business

2. In break-even analysis the contribution margin is defined as: A. sales minus variable costs. B. sales minus fixed costs. C. variable costs minus fixed costs. D. fixed costs minus variable costs.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-02 Break-Even Analysis

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Chapter 05 - Operating and Financial Leverage

3. At the break-even point, a firm's profits are: A. greater than zero. B. less than zero. C. equal to zero. D. not enough information to tell.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-02 Break-Even Analysis

4. If a firm has a break-even point of 20,000 units and the contribution margin on the firm's single product is $3.00 per unit and fixed costs are $60,000, what will the firm's net income be at sales of 30,000 units? A. $90,000 B. $30,000 C. $15,000 D. $45,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-02 Break-Even Analysis

5. If sales volume exceeds the break-even point, the firm will experience: A. an operating loss. B. an operating profit. C. an increase in plant and equipment. D. an increase in share price.

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Chapter 05 - Operating and Financial Leverage Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-02 Break-Even Analysis

6. The break-even point can be calculated as: A. variable costs divided by contribution margin. B. total costs divided by contribution margin. C. variable cost times contribution margin. D. fixed cost divided by contribution margin.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-02 Break-Even Analysis

7. A highly automated plant would generally have: A. more variable costs than fixed costs. B. more fixed costs than variable costs. C. all fixed costs. D. all variable costs.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-03 A More Conservative Approach

8. Which of the following is concerned with the change in operating profit as a result of a change in volume? A. Financial leverage B. Break-even point C. Operating leverage D. Combined leverage

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Chapter 05 - Operating and Financial Leverage Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-06 Degree of Operating Leverage

9. The degree of operating leverage is computed as: A. percent change in operating profit divided by percent change in net income. B. percent change in volume divided by percent change in operating profit. C. percent change in EPS divided by percent change in operating income. D. percent change in operating income divided by percent change in volume.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-06 Degree of Operating Leverage

10. 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? A. A has a lower break-even point than B, but A's profit grows faster after the break-even. B. A has a higher break-even point than B, but A's profit grows slower after the break-even. C. B has a lower break-even point than A, but A's profit grows faster after the break-even. D. B has a lower break-even point than A, and profit grows the same rate for both companies after the break-even point.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-06 Degree of Operating Leverage

11. Firms with a high degree of operating leverage are: A. easily capable of surviving large changes in sales volume. B. usually trading off lower levels of risk for higher profits. C. significantly affected by changes in interest rates. D. trading off higher fixed costs for lower per-unit variable costs.

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Chapter 05 - Operating and Financial Leverage Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-04 The Risk Factor

12. If EBIT equals $140,000 and interest equals $21,000, with a tax rate of 31%, what is the degree of financial leverage? A. 6.67x B. 5.67x C. 3.91x D. 1.18x

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-09 Financial Leverage

13. Financial leverage is concerned with the relation between: A. changes in volume and changes in EPS. B. changes in volume and changes in EBIT. C. changes in EBIT and changes in EPS. D. changes in EBIT and changes in operating income.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-09 Financial Leverage

14. Heavy use of long-term debt may be beneficial in an inflationary economy because: A. the debt may be repaid in more "expensive" dollars. B. nominal interest rates exceed real interest rates. C. inflation is associated with the peak of a business cycle. D. the debt may be repaid in "cheaper" dollars.

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Chapter 05 - Operating and Financial Leverage Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-10 Impact on Earnings

15. A conservative financing plan involves: A. heavy reliance on debt. B. heavy reliance on equity. C. high degree of financial leverage. D. high degree of combined leverage.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-10 Impact on Earnings

16. Combined leverage is concerned with the relationship between: A. changes in EBIT and changes in EPS. B. changes in volume and changes in EPS. C. changes in volume and changes in EBIT. D. changes in EBIT and changes in net income.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-16 Degree of Combined Leverage

17. A firm would be indifferent between financing plans when: A. debt is equal to equity. B. return on assets equals return on equity. C. the cost of borrowed funds equals the return on equity. D. the cost of borrowed funds equals the return on assets.

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Chapter 05 - Operating and Financial Leverage Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 05-05 Calculate the indifference point between financing plans using EBIT/EPS analysis. Topic: 05-12 The Indifference Point

18. If the business cycle were 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. A. Firm A B. Firm B C. Indifferent between the two. D. It depends on how much financial leverage each firm has.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-16 Degree of Combined Leverage

19. If fixed costs rise while other variables stay constant: A. the break-even point decreases. B. degree of operating leverage decreases. C. total profit increases. D. total profit decreases.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-06 Degree of Operating Leverage

20. Under which of the following conditions could the overuse of financial leverage be detrimental to the firm? A. Stable industry. B. Cyclical demand for the firm's products. C. Upswing of business cycle. D. Low interest cost compared to return on assets.

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Chapter 05 - Operating and Financial Leverage Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-09 Financial Leverage

21. Cash break-even analysis: A. is helpful in analyzing the short-term outlook of the firm, particularly when it is in trouble financially. B. is important when analyzing long-term profitability. C. includes amortization expense as a fixed cost when calculating the degree of financial leverage. D. includes the amount of liabilities.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-05 Cash Break-Even Analysis

22. The degree of operating leverage may be defined as: A. the change in operating income divided by the change in unit volume. B. Q (P + VC) divided by Q (P + VC) - FC. C. S + TVC divided by S + TVC - FC. D. S - TVC divided by S - TVC - FC.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Hard Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-06 Degree of Operating Leverage

23. Conservatively leveraged Firm C and highly leveraged Firm H operate at the same level of earnings before interest and taxes where the return on assets is greater than the cost of debt. A. Firm C will have a higher return on equity than H. B. Firm H will have a higher return on equity than C. C. The return on equity will not be affected by financial leverage. D. The return on equity will be the same at an equal level of earnings.

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Chapter 05 - Operating and Financial Leverage Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-03 A More Conservative Approach

24. Which of the following is not true about leverage? A. Operating leverage influences the top half of the income statement, determining EBIT. B. Financial leverage deals with the bottom half of the income statement, determining EPS. C. Combined leverage utilizes the entire income statement, showing the impact of change in volume on EBIT. D. Combined leverage utilizes the percentage change in EPS and percentage change in sales.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-16 Degree of Combined Leverage

25. When a firm employs no debt: A. it has a financial leverage of one. B. it has a financial leverage of zero. C. its operating leverage is equal to its financial leverage. D. it will not be profitable.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-11 Degree of Financial Leverage

26. If the price per unit decreases because of competition but the cost structure remains the same: A. the break-even point increases. B. the break-even point decreases. C. the degree of financial leverage declines. D. the degree of combined leverage declines.

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Chapter 05 - Operating and Financial Leverage Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-11 Degree of Financial Leverage

27. Which of the following is true about the concept of leverage? A. At the break-even point, operating leverage is equal to zero. B. Combined leverage measures the impact of operating and financial leverage on EBIT. C. Financial leverage measures the impact of fixed costs on earnings. D. Combined leverage measures the impact of operating and financial leverage on EPS.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-15 Combining Operating and Financial Leverage

28. A firm's indifference point between debt and equity financing plans would occur when the: A. amount of debt used is equal to the amount of equity. B. cost of borrowing is low. C. cost of borrowed funds equals return on equity. D. current level of EBIT generates the same EPS under both plans.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 05-05 Calculate the indifference point between financing plans using EBIT/EPS analysis. Topic: 05-12 The Indifference Point

Sales (75,000 units) Variable costs Contribution margin Fixed manufacturing costs Operating income Interest Earnings before taxes Taxes (at 31%) Net income

$750,000 225,000 525,000 187,500 337,500 75,000 262,500 81,375 $181,125

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Chapter 05 - Operating and Financial Leverage

Shares outstanding

15,000

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Chapter 05 - Operating and Financial Leverage

29. The Degree of Operating Leverage is: A. 1.43x. B. 1.56x. C. 3.33x. D. 2.22x.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-06 Degree of Operating Leverage

30. The Degree of Financial Leverage is: A. 1.29x. B. 4.50x. C. 3.50x. D. 1.32x.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-11 Degree of Financial Leverage

31. The Degree of Combined Leverage is: A. 2.1x. B. 1.9x. C. 2.9x. D. 2.0x.

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Chapter 05 - Operating and Financial Leverage Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-16 Degree of Combined Leverage

Sales (30,000 units) Variable costs Contribution margin Fixed manufacturing costs Operating income Interest Earnings before taxes Taxes (at 31%) Net income Shares outstanding

$150,000 100,800 49,200 24,000 25,200 18,000 7,200 2,160 $5,040 600

32. This firm's break-even point is: A. 4,800 units. B. 14,634 units. C. 7,142 units. D. 18,000 units.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-02 Break-Even Analysis

33. The Degree of Operating Leverage (DOL) is: A. 1.58x. B. 1.95x. C. 3.50x. D. 1.40x.

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Chapter 05 - Operating and Financial Leverage Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-06 Degree of Operating Leverage

34. The Degree of Financial Leverage (DFL) is: A. 3.50x. B. 1.40x. C. 1.95x. D. 1.58x.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-04 Define and calculate financial leverage and assess its opportunities and limitations. Topic: 05-11 Degree of Financial Leverage

35. The Degree of Combined Leverage (DCL) is: A. 3.08x. B. 5.45x. C. 2.73x. D. 6.83x.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-06 Define and calculate combined leverage. Topic: 05-15 Combining Operating and Financial Leverage Topic: 05-16 Degree of Combined Leverage

36. Which of the following questions does break-even analysis not attempt to address? A. How much do changes in volume affect costs and profits? B. At what point does the firm break even? C. What is the most efficient level of capital assets to employ? D. Percentage change in earnings per share.

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Chapter 05 - Operating and Financial Leverage Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-02 Break-Even Analysis

37. If a firm has fixed costs of $30,000, a price of $4.00, and a break-even point of 15,000 units, the variable cost per unit is: A. $5.00. B. $2.00. C. $0.50. D. $4.00.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-02 Break-Even Analysis

38. If a firm has fixed costs of $20,000, variable cost per unit of $0.50, and a break-even point of 5,000 units, the price is: A. $2.50. B. $5.00. C. $4.00. D. $4.50.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-02 Break-Even Analysis

39. If a firm has a price of $4.00, variable cost per unit of $2.50, and a break-even point of 20,000 units, fixed costs are equal to: A. $13,333. B. $10,000. C. $30,000. D. $50,000.

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Chapter 05 - Operating and Financial Leverage Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-01 Define leverage as a method to magnify earnings available to the firm's common shareholders. Topic: 05-02 Break-Even Analysis

40. Financial leverage primarily affects the _________ while operating leverage primarily affects the __________. A. left-hand side of the balance sheet; the right-hand side of the balance sheet B. right-hand side of the balance sheet; the upper part of the income statement C. lower part of the income statement; the right-han...