Question Answer
The contribution margin per unit is equal to price per unit minus fixed costs per unit. False: CM/U = P – VC
Financial leverage influences the top half of the income statement while operating leverage deals with the bottom half. False: DFL & DOL have no bearing on the income statement
The degree of combined leverage is the degree of operating leverage times the degree of financial leverage. True: DOL x DFL = DCL
Operating leverage determines how income from operations is to be divided between debt holders and shareholders. False: DOL has no bearing on how income is to be divided
As the contribution margin rises, the break-even point goes up. False: CM = P-VC has no bearing on BEP
The degree of financial leverage measures the percentage change in EAT for every 1 percent move in EBIT True: DFL = EBIT/EBT
If fixed operating costs rise while other variables stay constant The degree of operating leverage increases
When a firm has no debt It has a financial leverage of one
Firm A has a high combined leverage and Firm B has a low combined leverage. If the business cycle were just beginning an upswing (sales increasing), which firm would you anticipate would likely to show better growth in EPS over the next year? Firm A
DOL = CM/EBIT
DFL = EBIT/EBT
DCL = DOL x DFL
Using the appropriate leverage multiplier, calculate the dollar amount of EAT if sales increased by 10% 10% x DCL= X EAT x (1 + X)= new EAT
CMR = CM/Sales
BEP = Fixed costs + Interest Expense/CMR
RNF (Total Assets – Current Liabilities) x % sales increase – Retained Earnings.
% sales increase New sales – Old sales / Old sales
Retained Earnings last year profit x ( 1 + % sales increase) – Dividends
Calculate Debt Financing Required Current Assets + Capital Assets = Total Assets,Total Assets – Financing with Equity =
How do you tell if a plan is riskier than another when financing with ST & LT The plan with a higher debt from ST financing would be riskier and more aggressive than the other