SIF - measures of leverage

A firm's degree of operating leverage (DOL) depends primarily upon its

• sales variability.

• level of fixed operating costs.

• closeness to its operating break-even point.

• debt-to-equity ratio.

In the context of operating leverage break-even analysis, if selling price per unit rises and all other variables remain constant, the operating break-even point in units will:

• fall

• rise

• stay the same

• still be indetermined until interest and preferred dividends paid are known

If a firm has a DOL of 5 at Q units, this tell us that:

• if sales rise by 5%, EBIT will rise by 5%.
• if sales rise by 1%, EBIT will rise by 1%.
• if sales rise by 5%, EBIT will fall by 25%.
• if sales rise by 1%, EBIT will rise by 5%.

A firm's degree of total leverage (DTL) is equal to its degree of operating leverage its degree of financial leverage (DFL).

• plus
• minus
• divided by
• multiplied by

The further a firm operates above its operating break-even point, the closer its degree of operating leverage (DOL) measure approaches           

• minus one
• zero
• one
• infinity

EBIT is usually the same thing as

• funds provided by operations.
• earnings before taxes.
• net income.
• operating profit.

If two companies have identical unit sales volume and operating risk, they are most likely to also have identical:

• sales risk
• business risk
• sensitivity of operating earnings to changes in the number of units produced and sold.
• none

Degree of operating leverage is best described as a measure of the sensitivity of:

• net earnings to changes in sales.
• $xed operating costs to changes in variable costs.
• operating earnings to changes in the number of units produced and sold.
• none

e business risk of a particular company is most accurately measured by the_x000D_ company’s:

• debt-to-equity ratio.
• efficiency in using assets to generate sales.
• operating leverage and level of uncertainty about demand, output prices, and competition.
• none

Consider two companies that operate in the same line of business and have the same degree of operating leverage: the Basic Company and the Grundlegend Company. "e Basic Company and the Grundlegend Company have, respectively, no debt and 50 percent debt in their capital structure. Which of the following statements is most accurate? Compared to the Basic Company, the Grundlegend Company has:

• a lower sensitivity of net income to changes in unit sales.
• the same sensitivity of operating income to changes in unit sales.
• the same sensitivity of net income to changes in operating income.
• none