CAPITAL STRUCTURE, LEVERAGE AND FINANCIAL RISK

Operating leverage occurs due to the existing of ______ in the firm

• variable cost

• operating cost

• fixed cost

• EBIT

The following statements are true regarding operating leverage EXCEPT

• A change in the volume of sales results in an "equal" change in operating profit (or loss).

• Operating leverage will magnify the effects of changes in sales on the firm’s earnings before interest and taxes

• A relative small change in sales will lead to large change in the firm’s EBIT

• Operating leverage concerns with the usage of fixed cost in a firm

Operating leverage is also known as 'gearing'

• Yes

• No

Choose the CORRECT statement

• Financial leverage concerns with the use of fixed costs by the firm for production

• Operating leverage concerns with the use of fixed financing costs by the firm

• Financial leverage is acquired by choice to increase the profit

• Degree of total leverage measures the sensitivity of earnings per share to the change in sales

DOL is a quantitative measure of the _________ of a firm’s operating profit to a change in the firm’s sales

The closer that a firm operates to its break-even point, the ________ is the absolute value of its DOL.

The debt financing variability in earnings per share is due to the ______ payment

Break-even analysis is important to _______ (you can choose more than one answer)

• determine the necessary level of operations to cover all operating costs

• help financial manger to determine the appropriate capital and price structure that results in higher firm’s value in long-term

• magnify the effects of changes in sales on the firm’s earnings before interest and taxes

• evaluate the profitability at various levels of sales

"A relative small change in sales will lead to large change in the firm’s EBIT". The following statement is true for ____

• Total leverage

• Financial leverage

• Operating leverage

• Market leverage

"It deals with the effects of financing decision on the stockholder’s return, that is the relationship between firm’s operating profit and earnings available to common stockholder". The following statement is referring to _____

• Total leverage

• Financial leverage

• Operating leverage

• Market leverage