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Exam 5: Operating and Financial Leverage

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Question 31

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A firm with a high degree of financial leverage could face financial difficulty even though it is in a stable industry.

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Question 32

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If a firm sells 40,000 units and the contribution margin on the firm's single product is $4.00 per unit and fixed costs are $60,000, what will the firm's operating profit be at this level of sales volume?

A) $100,000
B) $30,000
C) $15,000
D) $145,000

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Question 33

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If economic conditions were expected to be favorable, an investor would likely prefer a firm with a low degree of leverage.

A conservative financing plan involves

If a firm has a price of $6.00, a variable cost per unit of $4.00, and a break-even point of 40,000 units, fixed costs are equal to _____.

A firm with a high degree of combined leverage will, other things being equal, experience higher earnings in the expansionary part of the business cycle.

From the following income statement, calculate the a) degree of financial leverage. b) degree of operating leverage. c) degree of combined leverage. $\quad$ $\quad$ $\quad$ $\quad$ Income Statement $\quad$ $\quad$ For the year ended $12 / 31 / 10$ $\begin{array} { l r } \text { Sales } & \$ 575,000 \\ \text { TVC } & 260,000 \\ \text { Fixed costs } ( \mathrm { FC } ) & \underline{94,000} \\ \text { EBIT } & 221,000 \\ \text { Interest } & \underline{19.500} \\ \text { EBT } & 201,500 \\ \text { Taxes a } 35 \% & \underline { 70.525 } \\ \text { Net income } & 130,975 \\ \text { Shares outstanding } & 20,000 \\ \text { EPS } & \$ 6.55 \end{array}$

Which of the following is concerned with the change in operating profit as a result of a change in volume?

Heavy use of long-term debt may be beneficial in an inflationary economy because

Heister Corporation produces class rings to sell to college and high school students. These rings sell for $75 each, and cost $30 each to produce. Heister has fixed costs of $45,000. a) Calculate Heister's break-even point. b) How much profit (loss) will Heister have if it sells 800 rings? 6,000 rings? c) Heister's president, J. R. D'Angelo, expects an annual profit of $200,000. How many rings must be sold to attain this profit?

Operating leverage determines how income from operations is to be divided between debt holders and stockholders.

Which of the following is true about the concept of leverage?

Financial leverage primarily affects the left-hand side of the balance sheet.

A firm has operating profit of $15,000 on unit sales of 10,000 units. Fixed costs are $30,000. What is the firm's break-even sales level?

If a firm has the lowest possible degree of operating leverage and the lowest possible degree of financial leverage, then

Financial leverage emphasizes the impact of using debt in the business.

For firms in industries that offer some degree of stability, are in a positive stage of growth, and are operating in favorable economic conditions, the use of debt is not needed or recommended.

Which of the following is not true about leverage?

Cash break-even analysis

Degree of combined leverage considers the impact of a change in volume on the change in operating income.