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problem1: Which of the following statements about combined (operating & financial) leverage is true?

[A] Usage of both operating and financial leverage reduces a firm's risk.

[B] High operating leverage and high financial leverage offset one another, meaning that if sales increase by 10%, then EPS will also increase by 10%.

[C] If a firm employs both operating and financial leverage, any percent change in sales will produce a larger percent change in earnings per share.

[D] A firm that is in a capital-intensive industry should use a higher level of financial leverage than a firm that employs low levels of operating leverage.

problem2: Financing a portion of a firm's assets with securities bearing a fixed rate of return in hopes of increasing the return to stockholders refers to ___.

[A] Operating leverage

[B] Combined leverage

[C] Business risk

[D] Financial leverage 

problem3: A corporation with very high growth prospects and many positive NPV projects to fund may want to increase its dividend based on ______.

[A] The information effect

[B] The very low agency costs of the corporation

[C] The tax bias against capital gains

[D] The residual dividend theory 

problem4:  Which of these is true?

[A] Financial leverage is the responsiveness of the firm's EPS to fluctuations in EBIT.

[B] Financial leverage reduces a firm's risk.

[C] Financial leverage is the responsiveness of the firm's EBIT to fluctuations in sales.

 

[D] Financial leverage involves the incurrence of fixed operating costs in the firm's income stream.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M919459

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