Business Finance W10

What is the primary focus of Chapter 20 in the textbook?

• The history of financial institutions

• The sources of operating and financial leverage

• The principles of marketing strategies

• The study of organizational behavior

What does operating leverage primarily involve the use of?

• Variable factors of production to reduce risk

• Fixed factors of production to produce a level of output

• Variable costs to increase production flexibility

• Fixed costs to decrease business risk

What is a consequence of using operating leverage?

• Decreases business risk

• Increases production capacity

• Reduces variable costs

• Increases business risk

What is a characteristic of firms with large fixed costs (FC)?

• They have lower operating leverage.

• They can achieve profits at a higher level of production only.

• They must achieve a higher level of sales to break even.

• Their costs fluctuate completely with the level of output.

What is true about firms with no fixed costs (FC)?

• They have higher operating leverage.

• They must achieve a higher level of sales to break even.

• They have costs that fluctuate completely with the level of output.

• They cannot achieve profits at any level of production.

According to the image, how do earnings behave once fixed costs are covered?

• Earnings decrease as sales decrease

• Earnings remain constant regardless of sales

• Earnings tend to rise more rapidly than those of a firm with variable costs

• Earnings fluctuate significantly with market trends

What are the two types of risks mentioned for an individual firm?

• Market risk and liquidity risk

• Business risk and financial risk

• Operational risk and compliance risk

• Credit risk and systemic risk

What effect does increased variability of operating income have on a firm?

• It decreases financial risk.

• It increases market risk.

• It increases business risk.

• It has no effect on risk.

What characterizes the airline industry in terms of operating leverage?

• Low amount of operating leverage with many variable costs

• Large amount of operating leverage with a large proportion of fixed costs

• No operating leverage and only variable costs

• Moderate operating leverage with equal fixed and variable costs

What is a consequence of the airline industry having a large proportion of fixed costs?

• Decreases in operating income will be slow for given changes in production

• There will be a moderate increase in operating income for given changes in production

• Operating income will not be affected by changes in production

• There will be more rapid increases in operating income for given changes in production