Measures of Leverage

8 questions

1. When comparing levered vs. unlevered capital structures, leverage works to increase EPS for high levels of EBIT because:
Interest payments on the debt vary with EBIT levels. Interest payments on the debt stay fixed, leaving less income to be distributed over less shares. Interest payments on the debt stay fixed, leaving more income to be distributed over less shares.
1. The increase in risk to equity holders when financial leverage is introduced is evidenced by:
Higher EPS as EBIT increases. Higher variability of EPS with debt than all equity. Equivalence value between levered and unlevered firms in the presence of taxes.
1. Which of the following is not a constituent of business risk?
Financial riskOperating riskSales risk
1. Which of the following statements about a firm's capital structure is TRUE?
A high operating leverage indicates higher fixed cost as a percentage of total cost.Degree of operating leverage increases with increase in salesFinancial leverage does not arise from preferred stock
1. FastPens sells their pens at $2 per pen. The company has the following costs:
- Variable cost per pen = $1.2
- Fixed operating cost = $5,000
- Fixed financing cost = $8,000
Calculate FastPen's breakeven quantity of sales.
8,000 units13,000 units16,250 units
1. FastPens sells their pens at $2 per pen. The company has the following costs:
- Variable cost per pen = $1.2
- Fixed operating cost = $5,000
- Fixed financing cost = $8,000
Calculate FastPen's breakeven quantity of sales.
6,250 units8,000 units13,000 units
1. If FastPen's sales increase by 10%, its EBIT increases by 18%. If EBIT increases by 10%, its EPS increases by 15%. Calculate the company's degree of total leverage.
1.51.82.7
1. Which of the following statements about leverage is TRUE?
A firm with higher operating leverage will have lower breakeven quantity.A firm with higher financial leverage will have higher breakeven quantity.Operating breakeven quantity increases as variable cost increases.

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