Untitled Quiz

Generally, increases in leverage result in increased return and risk.

Breakeven analysis is used by the firm to determine the level of operations necessary to cover all fixed operating costs and to evaluate the profitability associated with various levels of sales.

The firm’s operating breakeven point is the level of sales necessary to cover all fixed operating costs.

Leverage results from the use of fixed-cost assets or funds to magnify returns to the firm’s owners.

Operating leverage is concerned with the relationship between the firm’s sales revenue and its operating expenses

Financial leverage is concerned with the relationship between the firm’s earnings after interest and taxes and its common stock earnings per share.

Total leverage is concerned with the relationship between the firm’s sales revenue and its common stock earnings per share.

Firm’s capital structure is the mix of the short-term debt, long-term debt, and equity maintained by the firm.

The levels of fixed-cost assets and funds that management selects affect the variability of returns.

The amount of leverage in the firm’s capital structure—the mix of long-term debt and equity maintained by the firm—can significantly affect its value by affecting return and risk.