Chapt

er05-Oper
ati
ngandFi
nanci
alLev
erage

Chapter05
Oper
ati
ngandFi
nanci
alLev
erage

Mul
ti
pleChoi
ceQuest
ions
 

1.
 Theconceptofoper ati
nglev
eragei
nvol
vest
heuseof_
___
___
___t
omagni
fyr
etur
ns
athighlevel
sofoperation.
 
A. 
fi
xedcost s
B. 
vari
ablecosts
C. 
mar gi
nalcosts
D. 
semi -
vari
ablecost
s

Accessibil
it
y:KeyboardNavi
gation
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-
02Calculat
ebreak-
eveni
nuni
tsandi
ndol
l
ars.
Topic:05-01LeverageinaBusiness
 

2.
 I
nbr eak-
evenanalysi
st hecont
ribut
ionmar
gini
sdef
inedas:
 
A.
 sal
esmi nusvari
ablecost s.
B.
 sal
esmi nusfi
xedcosts.
C.
 vari
ablecost
smi nusfixedcosts.
D.
 fi
xedcostsminusv ari
ablecosts.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

5-
1
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

3.
 Atthebreak-evenpoint
,afi
rm'
spr
ofi
tsar
e: 
A.
 great
erthanzer o.
B.
 l
essthanzer o.
C.
 equaltozero.
D.
 notenoughi nf
or mat
iontot
ell
.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

4. 
Ifafir
m hasabreak-
evenpointof20,000unit
sandthecont
ri
buti
onmar
ginonthe
fi
rm'ssingl
eproducti
s$3.00perunitandfixedcost
sare$60,
000,
whatwi
llt
hefi
rm'
s
netincomebeatsalesof30,000unit
s? 
A. 
$90,000
B. 
$30,000
C. 
$15,000
D. 
$45,000

Accessibil
it
y:KeyboardNavigati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

5.
 I
fsalesv ol
umeexceedst hebr
eak-
evenpoi
nt,
thef
ir
m wi
l
lexper
ience:
 
A.
 anoper ati
ngloss.
B.
 anoper ati
ngprofi
t.
C.
 anincr
easei nplantandequi
pment.
D.
 anincreaseinsharepri
ce.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

5-
2
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

6.
 Thebr eak-ev
enpoi ntcanbecalcul
atedas: 
A.
 variabl
ecost sdivi
dedbycont r
ibut
ionmar gi
n.
B.
 totalcostsdividedbycontr
ibuti
onmar gin.
C.
 variabl
ecostt imescontri
buti
onmar gi
n.
D.
 fixedcostdividedbycontri
buti
onmar gin.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

7.
 Ahighl
yautomatedplantwoul dgeneral
l
yhav
e: 
A.
 morevari
ablecost
sthanf ixedcosts.
B.
 morefi
xedcoststhanv ar
iablecosts.
C.
 al
lfi
xedcosts.
D.
 al
lvari
abl
ecosts.

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
01Definelev
erageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-03AMor eConservati
veApproach
 

8.
 Whichofthef ollowi
ngi
sconcer
nedwi
tht
hechangei
noper
ati
ngpr
ofi
tasar
esul
tof
achangeinv olume?  
A.
 Fi
nanciall
ev erage
B.
 Br
eak-evenpoi nt
C.
 Operat
inglev erage
D.
 Combinedl everage

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-
01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-06DegreeofOperat
ingLever
age
 

5-
3
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

9.
 Thedegr
eeofoperati
ngl
ev er
agei scomput edas: 
A.
 per
centchangei
noperat
ingpr of
itdiv
idedbyper centchangeinnetincome.
B.
 per
centchangei
nv ol
umedi v
idedbyper centchangei noperat
ingprofi
t.
C.
 per
centchangei
nEPSdividedbyper centchangei noperati
ngincome.
D.
 per
centchangei
noperat
ingincomedi videdbyper centchangeinvolume.

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-
01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-06DegreeofOperat
ingLever
age
 

10. Fi
rm Aempl oysahi ghdegreeofoper ati
ngleverage;Fir
m Bt akesamor e
conser v
ativ
eapproach.Whi choft hefoll
owingcompar at
ivestat
ement saboutfi
rmsA
andBi st r
ue? 
A. 
Ahasal owerbreak-evenpoi ntthanB, butA'sprofi
tgrowsf asteraft
erthe
break-even.
B. 
Ahasahi gherbreak-evenpoi ntthanB, butA'
spr ofi
tgrowssloweraf tert
he
break-even.
C. 
Bhasal owerbreak-evenpointt hanA, butA'sprofi
tgrowsf asteraft
erthe
break-even.
D. Bhasal owerbreak-evenpointt hanA, andprofitgrowst hesamer ateforbot
h
compani esaftert
hebr eak-evenpoi nt.

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-06DegreeofOperat
ingLever
age
 

11. 
Firmswi t
hahi ghdegreeofoperati
ngleverageare: 
A. 
easilycapableofsurvi
vi
nglargechangesinsal esvolume.
B. 
usuallytr
adingofflowerl
evel
sofr i
skforhigherprofits.
C. 
signifi
cantl
yaffect
edbychangesi ni
nterestrates.
D. 
tr
adingof fhigherf
ixedcost
sf orl
owerper -
unitvar
iablecost
s.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-04TheRi skFact
or
 

5-
4
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

12. 
IfEBITequals$140,
000andi
nter
estequal
s$21,
000,
wit
hat
axr
ateof31%,
whati
s
thedegreeoffinanci
all
ever
age?
 
A. 
6.67x
B. 
5.67x
C. 
3.91x
D. 
1.18x

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-
04Defineandcal
cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-09Financi
alLever
age
 

13. 
Financi
all
everagei
sconcer
nedwiththerelat
ionbet
ween:
 
A. 
changesinvolumeandchangesinEPS.
B. 
changesinvolumeandchangesinEBI
T.
C. 
changesinEBITandchangesinEPS.
D. 
changesinEBITandchangesinoper
atingincome.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
04Defineandcal
cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-09Financi
alLever
age
 

14. 
Heavyuseofl ong-ter
m debtmaybebenef ici
al i
nani nf
lat
ionar
yeconomy
because: 
A. 
thedebtmayber epaidinmor e"expensi
ve"dollars.
B. 
nominalint
erestratesexceedr eali
nter
estrates.
C. 
inf
lat
ionisassociatedwiththepeakofabusi nesscy cl
e.
D. 
thedebtmayber epaidin"cheaper"doll
ars.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
04Defineandcal
cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-10ImpactonEarni
ngs
 

5-
5
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

15.
 Aconservati
vefi
nancingplaninvol
ves:
 
A. 
heavyrel
ianceondebt.
B. 
heavyrel
i
anceonequi t
y .
C. 
highdegr
eeoff i
nanci
al l
everage.
D. 
highdegr
eeofcombi nedleverage.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
04Defineandcal
cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-10ImpactonEarni
ngs
 

16.
 Combinedlev
eragei
sconcer
nedwithther
elat
ionshi
pbet
ween:
 
A. 
changesinEBI
TandchangesinEPS.
B. 
changesinvol
umeandchangesinEPS.
C. 
changesinvol
umeandchangesinEBIT.
D. 
changesinEBI
Tandchangesinneti
ncome.

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-
06Defi
neandcal
cul
atecombi
nedl
ever
age.
Topic:05-16DegreeofCombinedLev
erage
 

17. 
Afir
m wouldbeindi
ffer
entbet
weenfi
nanci
ngplanswhen:
 
A. 
debtisequalt
oequit
y.
B. 
ret
urnonassetsequal
sretur
nonequit
y.
C. 
thecostofborr
owedfundsequalst
heret
urnonequit
y.
D. 
thecostofborr
owedfundsequalst
heret
urnonassets.

Accessibil
it
y:KeyboardNav i
gati
on
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and
Diff
icult
y:Medium
LearningObjecti
ve:05-
05Cal cul
atet
hei
ndi
ff
erencepoi
ntbet
weenf
inanci
ngpl
ansusi
ngEBI
T/EPSanal
ysi
s.
Topic:05-12TheIndiff
erencePoint
 

5-
6
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

18. 
Ifthebusinesscyclewerejustbegi
nni
ngit
supswing,whichfi
rm wouldyou
anti
cipatewouldbel i
kelytoshowthebestgr
owthinEPSov erthenextyear
?Fir
mA
hashighcombi nedleverageandFirm Bhasl
owcombi nedlever
age.
 
A. 
FirmA
B. 
FirmB
C. 
Indiff
erentbetweenthetwo.
D. 
Itdependsonhowmuchf inanci
all
ever
ageeachfi
rm has.

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
06Defi
neandcal
cul
atecombi
nedl
ever
age.
Topic:05-16DegreeofCombinedLev
erage
 

19. 
Iffi
xedcost sri
sewhileothervar
iablesstayconst
ant
: 
A. 
thebr eak-
ev enpointdecreases.
B. 
degreeofoper ati
nglever
agedecr eases.
C. 
totalprofi
tincreases.
D. 
totalprofi
tdecr eases.

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-06DegreeofOperat
ingLever
age
 

20.
 Underwhi choft hefol
lowi
ngcondit
ionscoul
dtheov
eruseoff
inanci
all
ever
agebe
detr
iment altothefir
m?  
A. 
Stabl
ei ndustry.
B. 
Cycli
cal demandf orthefi
rm'
sproducts.
C. 
Upswi ngofbusi nesscycl
e.
D. 
Lowi nterestcostcomparedtoret
urnonassets.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
04Defineandcal
cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-09Financi
alLever
age
 

5-
7
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

21. 
Cashbr eak-evenanal
ysis:
 
A. 
ishelpfulinanalyzi
ngt
heshor t-
ter
m outl
ookofthefi
rm,par
ti
cul
arl
ywheniti
sin
tr
oublefinanciall
y.
B. 
isimpor t
antwhenanalyzinglong-t
erm pr
ofi
tabi
l
ity
.
C. 
incl
udesamor ti
zati
onexpenseasaf i
xedcostwhencalcul
ati
ngt
hedegreeof
fi
nancialleverage.
D. 
incl
udest heamountofl i
abil
it
ies.

Accessibil
it
y:KeyboardNav i
gati
on
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Diff
icult
y:Medium
LearningObjecti
ve:05-01Definel
ever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-05CashBr eak-Ev
enAnalysi
s
 

22. 
Thedegreeofoperati
nglever
agemaybedefi
nedas: 
A. 
thechangeinoperat
ingincomediv
idedbyt
hechangeinuni
tvol
ume.
B. 
Q( P+VC)di v
idedbyQ( P+VC)-FC.
C. 
S+TVCdi videdbyS+TVC-FC.
D. 
S-TVCdi vi
dedbyS-TVC-FC.

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Remember
Diff
icult
y:Hard
LearningObjecti
ve:05-
01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-06DegreeofOperat
ingLever
age
 

23. 
Conservativel
yleveragedFirm Candhighlyl
everagedFi r
m Hoper at
eatthesame
l
evelofearningsbef oreint
erestandtaxeswherether eturnonassetsisgr
eatert
han
thecostofdebt . 
A. 
Fir
m Cwi llhaveahi gherret
urnonequitythanH.
B. 
Fir
m Hwi llhaveahi gherretur
nonequitythanC.
C. 
Thereturnonequi tywi l
lnotbeaff
ectedbyf i
nanciallever
age.
D. 
Thereturnonequi t
ywi l
lbethesameatanequal l
ev elofear
nings.

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:05-
01Definelev
erageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-03AMor eConservati
veApproach
 

5-
8
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

24. 
Whi chofthef ol
lowingisnottrueaboutl ev
erage? 
A. 
Operat i
ngleverageinfl
uencesthet ophalfoftheincomestatement ,deter
mining
EBIT.
B. 
Financiall
everagedeal swit
hthebot tom hal
foftheincomest atement ,
deter
mi ni
ng
EPS.
C. 
Combi nedleverageut i
li
zestheentireincomestatement,showingt heimpactof
changei nvol
umeonEBI T.
D. 
Combi nedleverageut i
li
zesthepercentagechangeinEPSandper centagechangein
sal
es.

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
06Defi
neandcal
cul
atecombi
nedl
ever
age.
Topic:05-16DegreeofCombinedLev
erage
 

25. 
Whenaf i
rm empl oysnodebt: 
A. 
ithasafinanciall
ev erageofone.
B. 
i
thasaf inanciall
ev er
ageofzero.
C. 
itsoper
atingleveragei sequal
toit
sfi
nanci
all
ever
age.
D. 
itwil
lnotbepr ofi
table.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Under st
and
Diff
icult
y:Easy
LearningObjecti
ve:05-
04Def i
neandcal cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-11DegreeofFinancialLev
erage
 

26. 
Ifthepri
ceperunitdecreasesbecauseofcompet
it
ionbutt
hecostst
ruct
ure
remainsthesame: 
A. 
thebreak-ev
enpointincreases.
B. 
thebreak-
evenpointdecr eases.
C. 
thedegreeoffi
nancialleveragedecl
ines.
D. 
thedegreeofcombi nedlev er
agedecli
nes.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:05-
04Def i
neandcal cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-11DegreeofFinancialLev
erage
 

5-
9
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

27. 
Whichoft hef ol
lowi
ngistr
ueabouttheconceptoflever
age?  
A. 
Atthebr eak-
ev enpoi
nt,
operati
nglev
erageisequaltozer
o.
B. 
Combi nedleveragemeasurestheimpactofoperat
ingandfinancial
leverageon
EBIT.
C. 
Financiall
everagemeasurestheimpactoffi
xedcostsonear ni
ngs.
D. 
Combi nedleveragemeasuresthei
mpactofoperati
ngandf i
nanciall
everageonEPS.

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:05-
06Defineandcal
culat
ecombinedlev
erage.
Topic:05-15Combi ni
ngOperati
ngandFinanci
alLev
erage
 

28. 
Afir
m'sindiff
erencepointbetweendebtandequit
yfi
nanci
ngplanswoul
doccur
whenthe: 
A. 
amountofdebtusedi sequaltotheamountofequi
ty.
B. 
costofborrowingislow.
C. 
costofborrowedf undsequalsretur
nonequit
y.
D. 
curr
entlevelofEBITgeneratesthesameEPSunderbot hpl
ans.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
05Cal cul
atet
hei
ndi
ff
erencepoi
ntbet
weenf
inanci
ngpl
ansusi
ngEBI
T/EPSanal
ysi
s.
Topic:05-12TheIndiff
erencePoint
 

Sal
es( 75,
000units) $750,
000
Variablecosts 225,
000
Cont ri
buti
onmar gin 525,
000
Fi
xedmanuf acturi
ngcost
s 187,
500
Oper ati
ngincome 337,
500
I
nterest 75,
000
Earningsbeforetaxes 262,
500
Taxes( at31%) 81,
375
Neti ncome $181,
125
Sharesout st
anding 15,
000

5-
10
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

29.
 TheDegr
eeofOper
ati
ngLev
eragei
s: 
A. 
1.43x.
B. 
1.56x.
C. 
3.33x.
D. 
2.22x.

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-
01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-06DegreeofOperat
ingLever
age
 

30. 
TheDegr
eeofFi
nanci
alLev
eragei
s: 
A. 
1.29x.
B. 
4.50x.
C. 
3.50x.
D. 
1.32x.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-
04Def i
neandcal cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-11DegreeofFinancialLev
erage
 

31. 
TheDegr
eeofCombi
nedLev
eragei
s: 
A. 
2.1x.
B. 
1.9x.
C. 
2.9x.
D. 
2.0x.

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-
06Defi
neandcal
cul
atecombi
nedl
ever
age.
Topic:05-16DegreeofCombinedLev
erage
 

5-
11
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

Sal
es( 30,
000units) $150,
000
Variablecosts 100,
800
Cont ri
buti
onmar gin 49,
200
Fi
xedmanuf acturi
ngcost
s 24,
000
Oper ati
ngincome 25,
200
I
nterest 18,
000
Earningsbeforetaxes 7,
200
Taxes( at31%) 2,
160
Neti ncome $5,
040
Sharesout st
anding 600

32.
 Thisfi
rm'sbr
eak-
evenpoi
nti
s: 
A. 
4,800unit
s.
B. 
14,634unit
s.
C. 
7,142unit
s.
D. 
18,000unit
s.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

33.
 TheDegr
eeofOper
ati
ngLev
erage(
DOL)i
s: 
A. 
1.58x.
B. 
1.95x.
C. 
3.50x.
D. 
1.40x.

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-
01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-06DegreeofOperat
ingLever
age
 

5-
12
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

34. 
TheDegr
eeofFi
nanci
alLev
erage(
DFL)i
s: 
A. 
3.50x.
B. 
1.40x.
C. 
1.95x.
D. 
1.58x.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-
04Def i
neandcal cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-11DegreeofFinancialLev
erage
 

35. 
TheDegr
eeofCombi
nedLev
erage(
DCL)i
s: 
A. 
3.08x.
B. 
5.45x.
C. 
2.73x.
D. 
6.83x.

Accessibil
it
y:KeyboardNav
igation
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-
06Defineandcal
culat
ecombinedlev
erage.
Topic:05-15Combi ni
ngOperati
ngandFinanci
alLev
erage
Topic:05-16DegreeofCombi nedLev
erage
 

36. 
Whichoft hefol
lowingquestionsdoesbreak-evenanal
y si
snotat
temptt
o
address? 
A. 
Howmuchdochangesi nv ol
umeaf fectcostsandprofi
ts?
B. 
Atwhatpoi ntdoesthefir
m breakev en?
C. 
Whatist hemostef f
ici
entlevelofcapit
alassetstoemploy?
D. 
Percentagechangeinearningspershar e.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

5-
13
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

37.
 Ifafi
rm hasfi
xedcostsof$30,
000,apri
ceof$4.
00,
andabr
eak-
evenpoi
ntof
15,
000units,thev
ari
ablecostperuni
tis:
 
A. 
$5.00.
B. 
$2.00.
C. 
$0.50.
D. 
$4.00.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

38. I
fafir
m hasfi
xedcost
sof$20,000,vari
abl
ecostperuni
tof$0.
50,
anda
break-ev
enpointof5,
000uni
ts,
thepriceis:
 
A. 
$2.50.
B. 
$5.00.
C. 
$4.00.
D. $4.
50.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

39. 
Ifafi
rm hasapri
ceof$4.
00,var
iablecostperuni
tof$2.
50,
andabr
eak-
evenpoi
nt
of20,000unit
s,f
ixedcost
sareequalto: 
A. 
$13,333.
B. 
$10,000.
C. 
$30,000.
D. 
$50,000.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

5-
14
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

40.
 Financiall
everageprimari
lyaff
ectsthe_____
_ _
__whileoperati
ngl ev
eragepri
mari
l
y
aff
ect sthe_____
_ __
__. 
A. 
left-
handsideoft hebalancesheet;t
her i
ght-
handsideofthebal ancesheet
B. 
right-
handsideoft hebalancesheet;theupperpartoftheincomest atement
C. 
lowerpar toftheincomest at
ement ;
theright
-handsideofthebal ancesheet
D. 
theupperpar toftheincomest atement;t
heleft-
handsideoft hebalancesheet

Accessibil
it
y:KeyboardNavi
gation
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
02Calculat
ebreak-
eveni
nuni
tsandi
ndol
l
ars.
Topic:05-01LeverageinaBusiness
 

41. 
Oper at
ingleveragepri
mar i
lyaff
ectsthe___
_____
__whilef i
nanci
allever
age
pri
mar il
yaffect
st he_____
_____.
 
A. 
left-
handsideoft hebalancesheet;t
helowerpartoft
hei ncomest atement
B. 
right-
handsideoft hebalancesheet;t
heupperpartoft
hei ncomest atement
C. 
thelowerpar toftheincomest at
ement ;
theri
ght-
handpar tofthebalancesheet
D. 
theupperpar toftheincomest atement;t
helef
t-
handsideoft hebalancesheet

Accessibil
it
y:KeyboardNavi
gation
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
02Calculat
ebreak-
eveni
nuni
tsandi
ndol
l
ars.
Topic:05-01LeverageinaBusiness
 

42. 
Financiall
everagei
sdetermi
nedt
oal
argeex
tentbyt
hef
ir
m's:
 
A. 
wor ki
ngcapitalchoi
ce.
B. 
capitalbudgeti
ngchoice.
C. 
capitalstr
uctur
echoice.
D. 
divi
dendpol i
cychoice.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
04Defineandcal
cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-09Financi
alLever
age
 

5-
15
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

43. 
Aweaknessofbr eak-ev
enanalysisisthatitassumes: 
A. 
revenueandcostsareal i
near(
const ant
)functionofvol
ume.
B. 
pri
cesandcostsincreasewhent heeconomyi sstr
ongandconf
idencei
shi
gh.
C. 
costofgoodssoldgoesupasr ev enueincrease.
D. 
thereisnoweakness.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
01Definel
ever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-08Operati
ngLeverage
 

44.
 Financiall
everagedeal
swit
h: 
A. 
therelati
onshipoffi
xedandvari
abl
ecost
s.
B. 
therelati
onshipofdebtandequi
tyi
nthecapi
tal
str
uct
ure.
C. 
theent i
reincomestatement
.
D. 
theent i
rebalancesheet
.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-
04Defineandcal
cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-09Financi
alLever
age
 

45. 
AhighDOLmeans:  
A. 
ther
earehighlabourcost
s.
B. 
ther
eishi
ghdebt .
C. 
ther
eisalargeamountofequi
ty.
D. 
ther
earehighfixedcost
s.

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-
01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-06DegreeofOperat
ingLever
age
 

5-
16
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

46. 
Inbreak-
evenanalysi
sthecontr
ibut
ionmar
gini
sdef
inedas:
 
A. 
salesminusvariabl
ecosts.
B. 
salesminusfi
xedcosts.
C. 
fi
xedcostsmi nusvari
abl
ecosts.
D. 
fi
xedcostsmi nusamorti
zati
on.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-01Definel
ever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-05CashBr eak-Ev
enAnalysi
s
 

47. 
Ift
hecontr
ibut
ionmargi
nonthefi
rm'
ssingl
epr
oducti
s$2.
00peruni
tandfi
xed
costsare$60,
000,whatwi
ll
thef
irm'
sneti
ncomebeatsal
esof30,
000uni
ts?
 
A. 
$90,000
B. 
$30,000
C. 
$15,000
D. 
$0

Accessibil
it
y:KeyboardNavigati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

48. 
Ifsal
esv ol
umei slessthanthebr
eak-
evenpoi
nt,
thef
ir
m wi
l
lexper
ience:
 
A. 
anoper at
ingloss.
B. 
anoper at
ingprofi
t.
C. 
anincreaseinplantandequipment.
D. 
anincreaseinshareprice.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

5-
17
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

49. 
Apl antrely
ingmost lyonmanual
labourwoul
dgener
all
yhav
e: 
A. 
mor ev ari
ablethanfixedcost
s.
B. 
moref ixedthanv ari
ablecost
s.
C. 
allf
ixedcost s.
D. 
allv
ar i
ablecost s.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
03Defineandcal
cul
ateoper
ati
ngl
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-08Operati
ngLeverage
 

50. 
IfEBITequals$280,
000andi
nter
estequal
s$20,
000,
wit
hat
axr
ateof31%,
whati
s
thedegreeoffinanci
all
ever
age?
 
A. 
14.00x
B. 
9.66x
C. 
3.91x
D. 
1.08x

Accessibil
it
y:KeyboardNavigati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-
04Def i
neandcal cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-11DegreeofFinancialLev
erage
 

51. 
Heavyuseofl ong-ter
m debtmaybedet rimentali
nadefl
ati
onar
yeconomy
because: 
A. 
thedebtmayber epaidinmor e"expensi
ve"dollar
s.
B. 
nominalint
erestratesexceedr eali
nter
estr at
es.
C. 
inf
lat
ionisassociatedwiththepeakofabusi nesscycl
e.
D. 
thedebtmayber epaidin"cheaper"doll
ars.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
04Defineandcal
cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-10ImpactonEarni
ngs
 

5-
18
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

52. 
Iffi
xedcost sdecreaseswhil
eothervari
abl
esst
ayconst
ant
: 
A. 
thebr eak-
ev enpointincr
eases.
B. 
degreeofoper ati
ngleveragei
ncreases.
C. 
totalprofi
tdecr ease.
D. 
totalprofi
tincreases.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

53. 
Ift
hepr i
ceperunitincreasesbutthecostst
ruct
urer
emai
nst
hesame:
 
A. 
thebreak-ev
enpointr i
ses.
B. 
thedegreeofcombi nedl ever
ageincr
eases.
C. 
thedegreeoffi
nancial l
ev er
ageincr
eases.
D. 
thebreak-ev
enpointf al
ls.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-01Definel
ever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-05CashBr eak-Ev
enAnalysi
s
 

Sal
es( 100,
000units) $1,
000,
000
Variablecosts 300,
000
Cont ri
buti
onmar gin 700,
000
Fi
xedmanuf acturi
ngcost
s 250,
000
Oper ati
ngincome 450,
000
I
nterest 60,
000
Earningsbeforetaxes 390,
000
Taxes( at31%) 120,
000
Neti ncome $269,
100
Sharesout st
anding 10,
000

5-
19
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

54.
 TheDegr
eeofOper
ati
ngLev
eragei
s: 
A. 
1.79x.
B. 
1.56x.
C. 
2.22x.
D. 
2.33x.

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-
01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-06DegreeofOperat
ingLever
age
 

55. 
TheDegr
eeofFi
nanci
alLev
eragei
s: 
A. 
1.56x.
B. 
1.79x.
C. 
7.50x.
D. 
1.15x.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-
04Def i
neandcal cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-11DegreeofFinancialLev
erage
 

56. 
TheDegr
eeofCombi
nedLev
eragei
s: 
A. 
2.79x.
B. 
1.90x.
C. 
1.79x.
D. 
3.46x.

Accessibil
it
y:KeyboardNav
igation
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-
06Defineandcal
culat
ecombinedlev
erage.
Topic:05-15Combi ni
ngOperati
ngandFinanci
alLev
erage
Topic:05-16DegreeofCombi nedLev
erage
 

5-
20
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

57. LeverProduct
s(LP)isconsi
deringtheeli
mi nat
ionofapr
essmachine.Thenew
pressmachi neshouldreducedepreciat
ionexpensesby$80,
000annuall
y.IfLP'
stot
al
fi
xedcost swer e$420,
000lastyear,whatwouldLP'snewbreak-
evenpointinuni
tsi
f
thecont ri
buti
onmar gi
nis3.75perunit? 
A. 
68, 000unit
s
B. 
90, 667unit
s
C. 
100, 800unit
s
D. 50,667unit
s

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-01Definel
ever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-05CashBr eak-Ev
enAnalysi
s
 

58. 
Ifafi
rm hasa30%changeinoperat
ingi
ncome,andit
sDegr
eeofOperati
ng
Leverageis3.
63,whatwasi
tspercent
agechangei
nunitvol
ume,al
lot
herthi
ngs
consider
ed? 
A. 
36.5%
B. 
12.52%
C. 
8.26%
D. 
360%

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Appl y
Diff
icult
y:Hard
LearningObjecti
ve:05-
01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-06DegreeofOperat
ingLever
age
 

59. 
Salesvolumesl owerthant
hebreak-
evenpoi
ntr
esul
tinaf
ir
m hav
ing
___
________
___ ____
_. 
A. 
operati
ngl osses
B. 
operati
ngpr ofit
s
C. 
breakevencashf l
ows
D. 
agai nofpot ent
iall
ever
ageandbankfi
nanci
ng

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

5-
21
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

60. 
ECGhasacontri
but
ionmargi
nof$196,
000.I
fECGearned$87,
000bef
oret
axesi
n
theyear
,whati
sthefi
rm'sDegr
eeofCombinedLev
erage?
 
A. 
2.26x
B. 
1.27x
C. 
0.44x
D. 
1.29x

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Appl y
Diff
icult
y:Easy
LearningObjecti
ve:05-
06Defineandcal
culat
ecombinedlev
erage.
Topic:05-15Combi ni
ngOperati
ngandFinanci
alLev
erage
 
 

Tr
ue/Fal
seQuest
ions
 

61.
 Operat
ingLev
eragei
stheuseoff
ixedcost
stomagni
fyr
etur
nsathi
ghl
evel
sof
operat
ion.
 
TRUE

Accessibil
it
y:KeyboardNavi
gation
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-
02Calculat
ebreak-
eveni
nuni
tsandi
ndol
l
ars.
Topic:05-01LeverageinaBusiness
 

62.
 Oper
ati
ngLev
eragewor
ksbestwhenv
olumei
sincr
easi
ng.
 
TRUE

Accessibil
it
y:KeyboardNavi
gation
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-
02Calculat
ebreak-
eveni
nuni
tsandi
ndol
l
ars.
Topic:05-01LeverageinaBusiness
 

5-
22
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

63.
 Li
nearbr
eak-
evenanal
ysi
sassumest
hatcost
sar
eli
nearf
unct
ionsofv
olume.
 
TRUE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

64.
 Thecl
oserafir
mist
oit
sbr
eak-
evenpoi
nt,
thel
owert
hedegr
eeofoper
ati
ng
l
everagewi
llbe.
 
FALSE

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-
01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-06DegreeofOperat
ingLever
age
 

65. 
Thedegreeofoperat
ingl
ever
ageisanumberi
ndicat
ingther
elat
ionshi
pbetween
theper
centagechangesinsal
estot
hepercent
agechangeinear
ningspershar
e. 
FALSE

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-
01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-06DegreeofOperat
ingLever
age
 

66.
 Oper
ati
ngl
ever
agei
sconcer
nedwi
tht
heuseofcapi
tal
asset
sint
hebusi
ness.
 
TRUE

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-
01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-06DegreeofOperat
ingLever
age
 

5-
23
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

67.
 Oper
ati
ngl
ever
agedeter
mineshowincomef
rom oper
ati
onsi
stobedi
vi
ded
bet
weendebthol
dersandshar
ehol
der
s. 
FALSE

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-
01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-06DegreeofOperat
ingLever
age
 

68.
 Fi
nanci
all
ever
agei
sconcer
nedwi
tht
heuseofdebti
nthebusi
ness.
 
TRUE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
04Def i
neandcal cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-11DegreeofFinancialLev
erage
 

69.
 Thedegr
eeoffi
nanci
all
ever
agemeasur
est
heper
cent
agechangei
nEPSf
orev
ery
1percentmovei
nEBIT. 
TRUE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:05-
04Def i
neandcal cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-11DegreeofFinancialLev
erage
 

70.
 Fi
nanci
all
ever
agepr
imar
il
yaf
fect
sthel
eft
-handsi
deoft
hebal
ancesheet
. 
FALSE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
04Def i
neandcal cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-11DegreeofFinancialLev
erage
 

5-
24
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

71.
 I
fafi
rm hasaDFLof2.
0,EPSwi
l
lchange2%f
orev
ery1%changei
nvol
ume.
 
FALSE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
04Def i
neandcal cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-11DegreeofFinancialLev
erage
 

72.
 Oper
ati
ngi
ncomei
snott
hesamet
hingasEBI
T. 
FALSE

Accessibil
it
y:KeyboardNavi
gation
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-
02Calculat
ebreak-
eveni
nuni
tsandi
ndol
l
ars.
Topic:05-01LeverageinaBusiness
 

73. 
Operati
nglev
erageinf
luencesthebot
tom hal
foft
hei
ncomest
atementwhi
l
e
fi
nanci
al l
ever
agedealswiththetophal
f.
 
FALSE

Accessibil
it
y:KeyboardNavi
gation
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
02Calculat
ebreak-
eveni
nuni
tsandi
ndol
l
ars.
Topic:05-01LeverageinaBusiness
 

74.
 Thedegr
eeofcombinedlever
ageist
hesum oft
hedegr
eeofoper
ati
ngl
ever
age
andthedegr
eeoffi
nanci
allever
age.
 
FALSE

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
06Defineandcal
culat
ecombinedlev
erage.
Topic:05-15Combi ni
ngOperati
ngandFinanci
alLev
erage
 

5-
25
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

75.
 Fi
rmswi
thcy
cli
cal
sal
esshoul
dempl
oyahi
ghdegr
eeofl
ever
age.
 
FALSE

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
05Calcul
atet
heindif
ferencepointbet
weenf
inanci
ngpl
ansusi
ngEBI
T/EPSanal
ysi
s.
Topic:05-13Valuati
onBasi
cswithFi
nancialLeverage
 

76. 
Ifeconomiccondi
ti
onswereexpectedt
obef
avour
abl
e,ani
nvest
orwoul
dli
kel
y
pref
eraf i
rm wi
thalowdegreeofl
everage.
 
FALSE

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
05Calcul
atet
heindif
ferencepointbet
weenf
inanci
ngpl
ansusi
ngEBI
T/EPSanal
ysi
s.
Topic:05-13Valuati
onBasi
cswithFi
nancialLeverage
 

77.
 Thecont
ri
but
ionmar
gini
sequal
topr
iceperuni
tmi
nust
otal
cost
speruni
t.
 
FALSE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

78.
 Ast
hecont
ri
but
ionmar
ginr
ises,
thebr
eak-
evenpoi
ntgoesdown.
 
TRUE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

5-
26
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

79.
 Manager
swhoar
eriskaverseanduncer
tai
naboutt
hef
utur
ewoul
dmostl
i
kel
y
mini
mizecombi
nedl
everage.
 
TRUE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-04TheRi skFact
or
 

80. 
Cashbreak-
evenanal
ysi
sel
i
minat
est
heamor
ti
zat
ionexpenseandot
hernon-
cash
chargesf
rom capi
tal
costs.
 
TRUE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:05-01Definel
ever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-05CashBr eak-Ev
enAnalysi
s
 

81.
 Theanal
ysi
sofoper
ati
ngl
ever
ageassumest
hatr
elat
ionshi
psbet
weenr
evenues
andcostsar
econst
ant.
 
TRUE

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:05-
01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-06DegreeofOperat
ingLever
age
 

82. 
Linearbr
eak-
evenanal
ysi
sandoper
ati
ngl
ever
agear
eonl
yval
i
dwi
thi
nar
elev
ant
rangeofproduct
ion.
 
TRUE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

5-
27
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

83. 
Operati
nglev
erageprimar
il
yaff
ectst
helef
thandsi
deofthebalancesheetwhi
l
e
fi
nanci
al l
ever
ageaffect
stheri
ghthandsi
deofthebal
ancesheet
. 
TRUE

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
06Defineandcal
culat
ecombinedlev
erage.
Topic:05-15Combi ni
ngOperati
ngandFinanci
alLev
erage
 

84. 
Thedegr
eeoffi
nanci
all
ever
agei
snoti
nfl
uencedbyt
hei
nter
estr
ateondebt
,onl
y
theamountbor
rowed.
 
FALSE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
04Def i
neandcal cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-11DegreeofFinancialLev
erage
 

85.
 Useoff
inanci
all
ever
agemustconsi
derr
isk,
notj
ustmaxi
mizi
ngpr
ofi
t.
 
TRUE

Accessibil
it
y:KeyboardNavi
gation
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-
02Calculat
ebreak-
eveni
nuni
tsandi
ndol
l
ars.
Topic:05-01LeverageinaBusiness
 

86.
 Al
owerpr
icef
ort
hef
ir
m'spr
oductwi
l
lreducet
hef
ir
m'sbr
eak-
evenpoi
nt.
 
FALSE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

5-
28
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

87.
 Operat
inglever
agewi
l
lchangewhenaf
ir
m al
ter
sthemi
xofcapi
tal
resour
cesand
l
abourthatituses.
 
TRUE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-03Defi
neandcal
cul
ateoper
ati
ngl
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-02Break-EvenAnalysi
s
 

88. 
Afirm wi
thahighdegreeofcombinedl
everagewill
,othert
hingsbeingequal
,
experi
encehigherear
ningsi
ntheexpansi
onarypartofthebusi
nesscy cle.
 
TRUE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Hard
LearningObjecti
ve:05-
06Defi
neandcal
cul
atecombi
nedl
ever
age.
Topic:05-16DegreeofCombinedLev
erage
 

89. 
Afir
m wi
thahighdegreeoffi
nanci
all
ever
agecoul
dfacef
inanci
aldi
ff
icul
tyev
en
thoughi
tisi
nastabl
eindustr
y. 
TRUE

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Hard
LearningObjecti
ve:05-
04Defineandcal
cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-09Financi
alLever
age
 

90.
 Managementshoul
dtai
l
ort
heuseofl
ever
aget
omeeti
tsownr
isk-
taki
ngdesi
res.
 
TRUE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-04TheRi skFact
or
 

5-
29
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

91. 
Forfi
rmsinindustr
iest
hatoff
ersomedegreeofst
abili
ty,
areinaposit
ivestageof
growth,
andareoper at
ingi
nfavour
ableeconomi
ccondit
ions,theuseofdebtisnot
neededorrecommended.  
FALSE

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:05-
05Calcul
atet
heindif
ferencepointbet
weenf
inanci
ngpl
ansusi
ngEBI
T/EPSanal
ysi
s.
Topic:05-13Valuati
onBasi
cswithFi
nancialLeverage
 

92.
 Theint
erwovenboundari
esofbanksanddif
fer
entt
radingcompani
esi
nJapan
makeiteasiert
oacqui
recrediti
nJapanthani
nCanada. 
TRUE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:05-
06Defi
neandcal
cul
atecombi
nedl
ever
age.
Topic:05-17AWor dofCauti
on
 

93.
 ForJapanesef
irmsthathavehighl
evel
sofoperati
ngandfi
nanci
all
ever
age,
maintai
ningsal
esvolumeisofcri
ti
cali
mportanceevenatt
hecostofpr
icecut
s. 
TRUE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Under st
and
Diff
icult
y:Hard
LearningObjecti
ve:05-
06Defi
neandcal
cul
atecombi
nedl
ever
age.
Topic:05-17AWor dofCauti
on
 

94.
 Gr
eat
erl
ever
agecanbeusedbyf
ir
msi
nper
iodsofst
rongeconomi
cgr
owt
h? 
TRUE

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Under st
and
Diff
icult
y:Easy
LearningObjecti
ve:05-
05Calcul
atet
heindif
ferencepointbet
weenf
inanci
ngpl
ansusi
ngEBI
T/EPSanal
ysi
s.
Topic:05-13Valuati
onBasi
cswithFi
nancialLeverage
 

5-
30
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

95. 
Rawmat er
ial
susedinthemanufactur
ingprocessaregener
all
ycl
assi
fi
edasf
ixed
costs.I
ncontr
ast,pr
oper
tytaxesar
eclassif
iedasvari
ablecost
s. 
FALSE

Accessibil
it
y:KeyboardNavi
gation
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-
02Calculat
ebreak-
eveni
nuni
tsandi
ndol
l
ars.
Topic:05-01LeverageinaBusiness
 

96.
 Br
eakevenindoll
arsi
scal
cul
atedbydi
vi
dingsal
esbyt
hecont
ri
but
ionmar
gini
n
per
centaget
erms. 
FALSE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

97.
 Lev
erageisastr
ategi
cchoicemadebymanagementbasedonassessmentofr
isk
andpotent
ial
posit
ivecashf
lowsandtheav
ail
abil
i
tyoffi
nanci
ng 
TRUE

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-
04Defineandcal
cul
atef
inanci
all
ever
ageandassessi
tsoppor
tuni
ti
esandl
i
mit
ati
ons.
Topic:05-09Financi
alLever
age
 

98.
 Thecombinedlever
ageistheresul
toft
her
educt
ioni
near
ningsf
rom f
ixedcost
s
andfrom amort
izat
ionexpense.
 
FALSE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-
06Defi
neandcal
cul
atecombi
nedl
ever
age.
Topic:05-16DegreeofCombinedLev
erage
 

5-
31
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

99. 
Nonli
nearbr
eak-ev
enanal
ysisi
stheuseofbr
eak-
evenanal
ysi
sbasedonthe
assumpti
onthatcostandr
evenuerel
ati
onshi
pst
oquanti
tysol
dmayvaryatdi
ff
erent
l
evelsofsal
es. 
TRUE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 
 

Shor
tAnswerQuest
ions
 

100.
 Fr
om t
hef
oll
owi
ngi
ncomest
atementf
or20X5,
cal
cul
ate:

A)Degr
eeoffi
nanci
alleverage
B)Degr
eeofoperat
ingleverage
C)Degr
eeofcombinedleverage

I
ncomeSt at
ement
f
ort
heyearended12/31/
20X5
Sal
es $440,
000
Vari
ablecost 240,
000
Contri
buti
onmargin 200,
000
Fi
xedcosts 96,
000
EBIT 104,
000
I
nterest 19,
200
EBT 84,
800
Taxes@35% 29,
680
NetIncome $55,
120
Sharesoutst
andi
ng 16,
00
EPS $5.
52

5-
32
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

A)DFL=EBI
T/EBT=$104,000/$84,800=1.23X
B)DOL=CM/EBiT=$200,
000/$104, 00=1.
92X
C)DCL=CM/EBT=$200,000/$84,800=2.36X=1.
231.
92

Accessibil
it
y:KeyboardNav i
gat i
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-01Definelever
ageasamet hodtomagni f
year
ningsav
ail
abl
etothefi
rm'scommonsharehol
der
s.
LearningObjecti
ve:05-04Defineandcalculat
efinanci
allever
ageandassessi
tsoppor
tuni
ti
esandli
mit
ati
ons.
LearningObjecti
ve:05-06Defineandcalculat
ecombi nedlever
age.
Topic:05-06DegreeofOper atingLever
age
Topic:05-09FinancialLev
erage
Topic:05-15Combi ningOperatingandFinanci
alLeverage
 

5-
33
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

101. 
Heist
erCorporat
ionpr
oducescl
assri
ngstosel
ltocol
l
egeandhighschool
student
s.Theseri
ngssellf
or$75each,
andcost$35eachtopr
oduce.Hei
sterhas
fi
xedcostsof$50,000.

A)Cal
culat
eHeister'
sbreak-evenpoint.
B)Howmuchpr ofit(l
oss)willHei
sterhavei
fitsel
l
s1,
000ri
ngs?8,000ri
ngs?
C)Hei
ster'
spr
esident,J.R.D'Angel
o,expect
sanannual
prof
itof$100,
000.Howmany
ri
ngsmustbesoldt oattai
nthisprofi
t? 

A)BE=FC/P-
VC=$50,
000/(
$75-
$35)=1.
250r
ings
B)Pr
ofi
torl
oss=PQ-VC(Q)-FC

=$75(1,000)-$35(
1,000)-$50,000
=$75,000-$35,000-$50,000
Loss=$( 10,
000)
=$75(8,000)-$50,
000-$35(8,000)
=$65,000-$50,000-$280,000
prof
it=$270,000

C)Prof
it
=PQ-VC( Q)-FC
=Q(P-VC)-FC
Q(P-VC)=Profi
t+FC
Q=(Profi
t+FC)/(
P-VC)=(
$100,
000+$50,
000)
/($75-$35)=3,
750r
ings

Accessibil
it
y:KeyboardNavigati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

5-
34
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

102. 
Anewr estauranti
sreadytoopenforbusiness.Iti
sestimatedthatthefoodcost
(vari
ablecost)willbe40%ofsales,whi
lefi
xedcostwi l
lbe$450,000.Thefir
styear'
s
salesestimatesare$1,250,
000.Thecosttostartupt hi
srest
aurantwill
be$2,000,000.
Twof inanci
ngal t
ernati
vesarebei
ngconsider
ed: (a)50%equityfinanci
ngand50%
debtat12%, or(b)allequi
tyfi
nanci
ng.Commonst ockcanbesol dat$5pershare.

A)Comput
ebreak-evenpoi
nt.
B)Comput
eDOL.
C)Comput
eDFLandDCLf orbot
hfinanci
ngpl
ans.
D)I
ncl
udeanexplanati
onofwhatyourcomput
ati
onsmean.
 

5-
35
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

A)Break-evenpoi ntinsal
esSales=Vari
abl
eCost+Fi
xedCost
Sal
es=0. 40Sal es+$450, 000
0.
60Sal es=$450, 000
Sal
es=$750, 000
B)DOL=( S-TVC/ S-TVC-FC)=( 1,
250,
000-0.
40(
$1,
250,
000)
)/(
$1,
250,
000-
0.
40($1,250,000)-$450,000)
DOL=$750, 000/$300,000=2.50x
C)PLANA

   

   

PLANB

   

   

D)Subj
ect
ive.

Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-01Definelever
ageasamet hodtomagni f
year
ningsav
ail
abl
etothefi
rm'scommonsharehol
der
s.
LearningObjecti
ve:05-04Defineandcalculat
efinanci
allever
ageandassessi
tsoppor
tuni
ti
esandli
mit
ati
ons.
LearningObjecti
ve:05-06Defineandcalculat
ecombi nedlever
age.
Topic:05-06DegreeofOper atingLever
age
Topic:05-09FinancialLev
erage
Topic:05-15Combi ningOperatingandFinanci
alLeverage
 

5-
36
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

103. 
Jim Wilsonisconsideringthepossi bi
li
tyofopeni
nghisownmachi neshop.He
expectsfi
rst-yearsalest
obe$600, 000,andhef eel
sthathi
svari
ablecostswill
be
approxi
mat ely50%ofsal es.Hisfixedcostsinthefir
styearwi
ll
be$250, 000.
Jimisconsi deri
ngt woway soffinancingthefir
m: (
a)60%equit
yf i
nanci
ngand40%
debtat14%, or(b)100%equi tyf
inancing.Hecansellcommonst ocktohi
sr el
ati
vesf
or
$10pershar e.Eitherway,hewillneedt orai
se$800,000.

A)Comput ehisbr
eak-evenpointi
ndoll
ars.
B)Calcul
atetheDegr
eeofOper ati
ngLeverageattheexpectedf
ir
st-
yearsal
esvol
ume.
C)Calcul
atetheDegreeofFinanci
alLeverageandtheDegreeofCombinedLever
age
undereachofthepossiblefi
nanci
ngplans.
D)Explai
ntheimpli
cationsofyouranswersift
hemachi neshopbusi
nessishi
ghl
y
cycl
ical
. 

A)

Br
eak-
evenpoi
nt Sales= Fi
xedCost+Vari
abl
eCost
  = $250,
000+0.5(
Sal
es)
  0.
5(Sales)= $250,
000
  Sales= $500,
000

5-
37
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

B)

   

C)60%Equi
ty/
40%Debt

   

100%Equi
ty

   

D)Thel
ever
agedpl
ani
shi
ghl
yri
skyi
fthemachi
neshopbusi
nessi
sver
ycy
cli
cal
.

Blooms:Appl y
Diff
icult
y:Hard
LearningObjecti
ve:05-01Definelever
ageasamet hodtomagni f
year
ningsav
ail
abl
etothefi
rm'scommonsharehol
der
s.
LearningObjecti
ve:05-04Defineandcalculat
efinanci
allever
ageandassessi
tsoppor
tuni
ti
esandli
mit
ati
ons.
LearningObjecti
ve:05-06Defineandcalculat
ecombi nedlever
age.
Topic:05-06DegreeofOper atingLever
age
Topic:05-09FinancialLev
erage
Topic:05-15Combi ningOperatingandFinanci
alLeverage
 

5-
38
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

104. DougRobinsonisconsi der
ingt hepossibi
li
tyofopeninghisownmanuf acturing
facil
it
y.Heexpect sfi
rst
-yearsalestobe$800, 000,andhef eel
sthathisvariablecost s
willbeapproximatel
y40%ofsal es.Hisfixedcostsinthefir
styearwill
be$200, 000.
Dougi sconsideri
ngtwoway soff i
nancingthefir
m: (a)40%equityfi
nancingand60%
debtat10%, or(b)100%equi tyf
inancing.Hecansellcommonst ocktohisrelati
v esfor
$10pershar e.Eit
herway ,hewillneedt orai
se$1,000,000.Computehisbr eak-ev en
pointindol
lars. 

Break-
evenpoi
ntSales=FixedCost+Var
iabl
eCost
=$200,000+0.4(Sales)
0.
4( Sal
es)=$200,
000
Sales=$500,
000

Accessibil
it
y:KeyboardNavigati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-02Break-EvenAnalysi
s
 

105.
 Cal
cul
atet
heDegr
eeofOper
ati
ngLev
erageatt
heexpect
edf
ir
st-
yearsal
es
vol
ume. 

Degr
eeofOper
ati
ngLev
erage

   

Accessibil
it
y:KeyboardNav
igati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-
01Defi
nelever
ageasamet
hodt
omagni
fyear
ningsav
ail
abl
etot
hef
ir
m'scommonshar
ehol
der
s.
Topic:05-06DegreeofOperat
ingLever
age
 

5-
39
Chapt
er05-Oper
ati
ngandFi
nanci
alLev
erage

106. 
Calcul
atet
heDegreeofFinanci
alLever
ageandt
heDegr
eeofCombi
nedLev
erage
undereachofthepossi
blef
inancingplans.
 

40%Equi
ty/
60%Debt

DCL=DOLDFL=1.
711.
27=2.
17x

100%Equi
ty

   

DCL=DOLDFL=1.
711.
0=1.
71x

Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:05-01Definelever
ageasamet hodtomagni f
year
ningsav
ail
abl
etothefi
rm'scommonsharehol
der
s.
LearningObjecti
ve:05-04Defineandcalculat
efinanci
allever
ageandassessi
tsoppor
tuni
ti
esandli
mit
ati
ons.
LearningObjecti
ve:05-06Defineandcalculat
ecombi nedlever
age.
Topic:05-06DegreeofOper atingLever
age
Topic:05-09FinancialLev
erage
Topic:05-15Combi ningOperatingandFinanci
alLeverage
 

107.
 Explai
nthei
mpl
i
cat
ionsofy
ouranswer
sift
hemachi
neshopbusi
nessi
shi
ghl
y
cycl
i
cal. 

Astheamountofl
ever
agei
snothi
ghf
ort
hisscenar
io,
thel
ever
agedpl
ani
snotv
ery
ri
sky.

Accessibil
it
y:KeyboardNav i
gat i
on
Blooms:Anal y
ze
Diff
icult
y:Hard
LearningObjecti
ve:05-01Definelever
ageasamet hodtomagni f
year
ningsav
ail
abl
etothefi
rm'scommonsharehol
der
s.
LearningObjecti
ve:05-04Defineandcalculat
efinanci
allever
ageandassessi
tsoppor
tuni
ti
esandli
mit
ati
ons.
LearningObjecti
ve:05-06Defineandcalculat
ecombi nedlever
age.
Topic:05-06DegreeofOper atingLever
age
Topic:05-09FinancialLev
erage
Topic:05-15Combi ningOperatingandFinanci
alLeverage
 

5-
40