Question 1

The degree of financial leverage (DFL) is defined as the percentage change in _____ that results from a given percentage change in earnings before interest and taxes (EBIT). 
A)sales
B)net operating income (NOI)
C)fixed financial costs
D)net income
E)earnings per share (EPS)

Accepted Answer

The degree of financial leverage (DFL) measures the sensitivity of a company's earnings per share (EPS) to changes in its earnings before interest and taxes (EBIT).

Question 2

Suppose a firm's degree of financial leverage (DFL) is 1.0. Which of the following statements concerning this firm is correct?
A)The firm must have fixed costs associated with its production process.
B)The firm's earnings per share (EPS) must equal zero.
C)The firm's degree of total leverage (DTL) must equal 1.0.
D)The firm's degree of operating leverage (DOL) must be greater than 1.0.
E)The firm has no long-term debt, preferred stock, or other sources of financing that require fixed payments.

Accepted Answer

A firm's degree of financial leverage (DFL) measures the sensitivity of earnings per share (EPS) to changes in earnings before interest and taxes (EBIT). A DFL of 1.0 implies that the firm has no long-term debt, preferred stock, or other sources of financing that require fixed payments. Therefore, choice E is the correct answer. Choices A, B, C, and D are incorrect because they do not necessarily follow from a DFL of 1.0.

Question 3

Financial leverage occurs because of the existence of fixed financial costs, which include _____. 
A)costs associated with production
B)preferred dividends
C)common stock dividends
D)depreciation expenses
E)accruals

Accepted Answer

Financial leverage is the use of debt financing to increase a company's return on equity. It occurs because of the presence of fixed financial costs, such as preferred dividends, that do not change with changes in sales, causing the company's net income to fluctuate more dramatically. Choice A is incorrect because variable, not fixed, costs are associated with production. Choice C is incorrect because common stock dividends are not fixed costs. Choice D is incorrect because depreciation expenses are non-cash, and do not directly affect net income. Choice E is incorrect because accruals are not fixed costs, but rather represent expenses that have been incurred but not yet paid.

Question 4

Which of the following mathematical equations is used to calculate the degree of operating leverage (DOL)? (Δ = change)
A)DOL = % Δ in net operating income (NOI)/% Δ in sales
B)DOL = % Δ in sales/% Δ in earnings before taxes (EBT)
C)DOL = % Δ in earnings before interest and taxes (EBIT)/% Δ in earnings per share (EPS)
D)DOL = % Δ in sales/% Δ in earnings per share (EPS)
E)DOL = % Δ in earnings per share (EPS)/% Δ in earnings before taxes (EBT)

Accepted Answer

DOL is calculated as the % Δ in net operating income (NOI) divided by the % Δ in sales. This equation helps to identify the impact of changes in sales on the operating income of a company.

Question 5

Operating breakeven analysis deals with the:
A)assets and liabilities forecasted in the pro forma balance sheet.
B)net cash flows from operations shown on the statement of cash flows.
C)noncash items included in operating activities.
D)revenues and expenses associated with a firm's normal production and selling operations.
E)interest payments to bondholders and the dividend payments to preferred stockholders.

Accepted Answer

Operating breakeven analysis focuses on the revenues and expenses associated with a firm's normal production and selling operations in order to determine the level of sales needed to cover all operating costs and reach the breakeven point. It does not involve assets and liabilities, net cash flows, noncash items, interest payments, or dividend payments.

Question 6

Trident Food Corporation generated the following income statement for the most recent fiscal year:

Sales revenues                                    $150,000
Variable cost of sales                          (120,000)
Gross profit                                            30,000
Fixed operating costs                           (10,000)
Net operating income (EBIT)             $20,000

What is the degree of operating leverage (DOL) for Trident Food?
A)1.5×
B)7.5×
C)5.0×
D)1.4×
E)2.5×

Accepted Answer

The degree of operating leverage (DOL) is calculated as: DOL = % Change in EBIT / % Change in Sales = Contribution Margin / EBIT. Here, Contribution Margin = Sales - Variable Costs = $150,000 - $120,000 = $30,000. EBIT = $20,000. Therefore, DOL = $30,000 / $20,000 = 1.5×.

Question 7

Trident Food Corporation generated the following income statement for the most recent fiscal year:

Sales revenues                                        $150,000
Variable cost of sales                              (120,000)
Gross profit                                                30,000
Fixed operating costs                               (10,000)
Net operating income (EBIT)                   20,000
Interest                                                     (15,000)
Earnings before taxes                                  5,000
Taxes (40%)                                               (2,000)
Net income                                                $3,000

What is Trident Food's degree of total leverage (DTL)?
A)4.0×
B)6.0×
C)1.5×
D)5.0×
E)50.0×

Accepted Answer

The answer of Trident Food Corporation generated the following income...

Question 8

Which of the following mathematical expressions is used to compute the degree of financial leverage (DFL) at a particular level of earnings before interest and taxes (EBIT)? Assume the firm has no preferred stock. 
A)DFL = Earnings before interest and taxes ÷ Earnings per share (EPS)
B)DFL = Gross profit ÷ Earnings before interest and taxes
C)DFL = Sales ÷ (Earnings before interest and taxes - Interest)
D)DFL = Earnings before interest and taxes ÷ (Earnings before interest and taxes - Interest)
E)DFL = (Earnings before interest and taxes - Interest - Taxes) ÷ Number of shares

Accepted Answer

The degree of financial leverage (DFL) is calculated as the percentage change in earnings per share (EPS) for a one percent change in earnings before interest and taxes (EBIT). It is used to measure the sensitivity of EPS to changes in EBIT. The formula for DFL is given as DFL = Earnings before interest and taxes ÷ (Earnings before interest and taxes - Interest).

Question 9

Suppose a firm increases its sales using existing fixed assets. Everything else equal, what effect will the increase in sales have on the firm's degree of operating leverage (DOL)?
A)The DOL should increase.
B)The DOL should decrease.
C)The DOL should not change, because the amount of fixed asset does not change.
D)The DOL should increase if fixed operating costs represent a significant proportion of total operating costs; otherwise, the DOL should decrease.
E)Because the fixed operating costs are not know, the impact on DOL cannot be determined.

Accepted Answer

The degree of operating leverage (DOL) measures how a change in sales affects operating income. When a firm increases its sales using existing fixed assets, it spreads its fixed costs over a larger sales volume, which decreases the DOL because each additional unit sold contributes more to covering variable costs and then to profits, reducing the firm's sensitivity to changes in sales volume.

Question 10

The financial breakeven point is the level of _____ at which earnings per share (EPS) is equal to zero. 
A)net operating income (NOI)
B)retained earnings
C)taxes
D)net income
E)interest payments

Accepted Answer

The financial breakeven point is the level of net operating income (NOI) at which earnings per share (EPS) is equal to zero. This means that all expenses, including interest payments and taxes, have been covered by the revenue generated from sales, leaving just enough to cover the cost of goods sold and overhead expenses. Retained earnings, net income, and taxes are not directly related to the financial breakeven point.

Question 11

A firm's financial breakeven point is defined as the operating income (NOI) at which its _____ is(are) equal to zero. 
A)earnings before interest and taxes (EBIT)
B)sales
C)earnings per share (EPS)
D)fixed financial costs
E)gross profit

Accepted Answer

The financial breakeven point is the level of operating income needed to cover all fixed financial costs, resulting in zero earnings per share (EPS).

Question 12

If a firm that has a degree of operating leverage (DOL) greater than 1.0 experiences a 1.0 percent change in _____, its earnings before interest and taxes (EBIT) will change by .0 percent. 
A)earnings per share; greater than
B)net income; greater than
C)net operating income; less than
D)sales; greater than
E)fixed costs; less than

Accepted Answer

A firm's DOL measures its sensitivity to changes in sales. If DOL is greater than 1.0, it implies that a 1.0 percent change in sales will lead to a greater than 1.0 percent change in EBIT. This is because a larger portion of the firm's costs are fixed, so a small change in sales can have a larger impact on profitability. Therefore, the best choice is sales.

Question 13

A firm would conduct operating breakeven analysis primarily to determine the:
A)minimum value of assets that it should hold to achieve profitability.
B)maximum amount of the total assets that should be financed with debt.
C)minimum earnings that should be retained and the earnings that should be paid out as dividends.
D)level of capacity utilization required to achieve its forecasted sales level.
E)level of sales a new product must achieve to be profitable.

Accepted Answer

Operating breakeven analysis is used to determine the level of sales at which a product or business will be profitable, by covering all its operating expenses.

Question 14

Expert Analysts Resources (EAR) has provided you with the following information about three companies you are currently evaluating:
?
C$\begin{array} { l c c } 
\text { Company } & \text { Degree of Operating Leverage (DOL) } & \text { Degree of Financial Leverage (DFL) } \\hline
\text { Acme } & 1.5 \times & 6.0 \times \
\text { Apex } & 3.0 \times & 4.0 \times \
\text { Alps } & 5.0 \times & 2.0 \times
\end{array}$
?
Based on this information, which firm is regarded as having the greatest overall risk?
A)Acme, because it has the highest degree of financial leverage (DFL).
B)Acme, because has the highest degree of total leverage (DTL).
C)Apex, because it has the highest degree of total leverage (DTL).
D)Alps, because it has the highest degree of operating leverage (DOL).
E)Acme, because it has the lowest degree of operating leverage (DOL).

Accepted Answer

The Degree of Total Leverage (DTL) is calculated by multiplying the Degree of Operating Leverage (DOL) by the Degree of Financial Leverage (DFL). Apex has the highest DTL (3.0 * 4.0 = 12.0), indicating the greatest overall risk.

Question 15

Which of the following statements about the degree of operating leverage (DOL) is correct?
A)The higher the DOL, the closer the firm is to its financial breakeven point.
B)The higher the DOL, the higher the firm's financial risk.
C)The lower the DOL, the higher the firm's operating risk.
D)The higher the DOL, the closer the firm is to its operating breakeven point.
E)The higher the DOL, the higher the percentage increase in the sales when fixed operating costs change.

Accepted Answer

The answer of Which of the following statements about the...

Question 16

New World Manufacturing has determined that its degree of financial leverage (DFL) is 3.0 when sales equal $750,000, which happens to be its operating breakeven point (i.e., SOpBE = $750,000). At sales equal to $750,000, which of the following conditions must exist for New World Manufacturing? Assume everything else is equal. 
A)Earnings per share (EPS) = 0
B)Earnings per share (EPS) > 0
C)Earnings per share (EPS) < 0
D)Earnings before interest and taxes (EBIT) > 0
E)Total operating costs = 0

Accepted Answer

The answer of New World Manufacturing has determined that its...

Question 17

Which of the following mathematical equations represents the operating breakeven point, QOpBEP, for a firm?
A)Sales = Gross profit margin
B)Sales = Total variable costs + Total fixed costs
C)Total operating costs = Total variable costs + Total contribution margin costs
D)Total operating costs = Contribution margin
E)Contribution margin = Earnings before interest and tax

Accepted Answer

The operating breakeven point is the level of sales at which a firm's total revenue equals its total costs, including fixed and variable costs. This is represented by the equation Sales = Total variable costs + Total fixed costs.

Question 18

Which of the following statements concerning the financial breakeven point, EBITFinBEP, is correct?
A)The financial breakeven point determines the impact of a firm's financing mix on its earnings per share (EPS).
B)The financial breakeven point determines the level of sales a new product must achieve to be profitable.
C)The financial breakeven point determines the effects of a general expansion in the level of a firm's operations.
D)The financial breakeven point analyzes the consequences of purchasing modernization projects that require increase investments in fixed assets.
E)The financial breakeven point represents the level of production and sales at which net operating income equals zero.

Accepted Answer

The financial breakeven point refers to the level of earnings before interest and taxes (EBIT) that a company must achieve to cover all of its financial expenses, thus having no impact on its earnings per share (EPS). It does not directly relate to sales levels, expansion, modernization projects, or the point where net operating income equals zero.

Question 19

Marcus Corporation currently sells 150,000 units per year at a price of $4.00 a unit. Its variable costs are 30 percent of sales, and its fixed operating costs are $300,000. What is Marcus's degree of operating leverage (DOL) at sales equal to 150,000 units?
A)1.4×
B)2.2×
C)3.5×
D)2.0×
E)5.0×

Accepted Answer

First, let's calculate the contribution margin per unit:
Price per unit - Variable cost per unit = Contribution margin per unit

$4.00 - ($4.00 x 0.30) = $2.80

Next, let's calculate the total contribution margin:
Contribution margin per unit x Units sold = Total contribution margin
$2.80 x 150,000 = $420,000

Now, let's calculate the operating income:
Total contribution margin - Fixed operating costs = Operating income
$420,000 - $300,000 = $120,000

The degree of operating leverage (DOL) can now be calculated:
DOL = Total contribution margin / Operating income

DOL = $420,000 / $120,000 = 3.5x

Therefore, the best choice is C.

Question 20

The percentage change in earnings before interest and taxes (EBIT) associated with a given percentage change in sales is known as the degree of _____ leverage. 
A)financial
B)total
C)operating
D)combined
E)equity

Accepted Answer

The degree of operating leverage is a measure of the sensitivity of EBIT to changes in sales, which indicates the operating risk of a company. It is calculated as the percentage change in EBIT divided by the percentage change in sales. Therefore, option C is the correct answer. Financial leverage refers to the use of debt financing, while total leverage incorporates both operating and financial leverage. Combined leverage is not a commonly known term in finance. Equity leverage is not a relevant term for this question.

Quiz 16: Financial Planning and Control

The degree of financial leverage (DFL) is defined as the percentage change in _____ that results from a given percentage change in earnings before interest and taxes (EBIT) .

Suppose a firm's degree of financial leverage (DFL) is 1.0. Which of the following statements concerning this firm is correct?

Financial leverage occurs because of the existence of fixed financial costs, which include _____.

Which of the following mathematical equations is used to calculate the degree of operating leverage (DOL) ? (Δ = change)

Operating breakeven analysis deals with the:

Which of the following mathematical expressions is used to compute the degree of financial leverage (DFL) at a particular level of earnings before interest and taxes (EBIT) ? Assume the firm has no preferred stock.

Suppose a firm increases its sales using existing fixed assets. Everything else equal, what effect will the increase in sales have on the firm's degree of operating leverage (DOL) ?

The financial breakeven point is the level of _____ at which earnings per share (EPS) is equal to zero.

A firm's financial breakeven point is defined as the operating income (NOI) at which its _____ is(are) equal to zero.

If a firm that has a degree of operating leverage (DOL) greater than 1.0 experiences a 1.0 percent change in _, its earnings before interest and taxes (EBIT) will change by _1.0 percent.

A firm would conduct operating breakeven analysis primarily to determine the:

Which of the following statements about the degree of operating leverage (DOL) is correct?

Which of the following mathematical equations represents the operating breakeven point, QOpBEP, for a firm?

Which of the following statements concerning the financial breakeven point, EBITFinBEP, is correct?

Marcus Corporation currently sells 150,000 units per year at a price of $4.00 a unit. Its variable costs are 30 percent of sales, and its fixed operating costs are $300,000. What is Marcus's degree of operating leverage (DOL) at sales equal to 150,000 units?

The percentage change in earnings before interest and taxes (EBIT) associated with a given percentage change in sales is known as the degree of _____ leverage.