University:
Montclair State University
Course:
INBS 250 | Introduction To International Business
Academic year:

2021
Views:

167

Pages:

2
Author:

gewoekerdodx

1. Firms with a high degree of operating leverage are A) easily capable of surviving large changes in sales volume B) usually trading off lower levels of risk for higher profits. C) significantly affected by changes in interest rates. D) trading off higher fixed costs for lower per-unit variable costs. Ans: D 2. If EBIT equals $140,000 and interest equals $21,000, with a tax rate of 31%, what is the degree of financial leverage? A) 6.67x B) 5.67 C) 3.91x D) 1.18x Ans: D 3. Financial leverage is concerned with the relation between A) changes in volume and changes in EPS. B) changes in volume and changes in EBIT. C) changes in EBIT and changes in EPS. D) changes in EBIT and changes in operating income. Ans: C 4. Heavy use of long-term debt may be beneficial in an inflationary economy because A) the debt may be repaid in more "expensive" dollars. B) nominal interest rates exceed real interest rates. C) inflation is associated with the peak of a business cycle. D) the debt may be repaid in "cheaper" dollars. Ans: D 5. A conservative financing plan involves A) heavy reliance on debt. B) heavy reliance on equity. C) high degree of financial leverage. D) high degree of combined leverage. Ans: B 6. Combined leverage is concerned with the relationship between A) changes in EBIT and changes in EPS. B) changes in volume and changes in EPS. C) changes in volume and changes in EBIT. D) changes in EBIT and changes in net income. Ans: B 7. A firm would be indifferent between financing plans when A) debt is equal to equity. B) return on assets equals return on equity. C) the cost of borrowed funds equals the return on equity. D) the cost of borrowed funds equals the return on assets. Ans: D 8. If the business cycle were just beginning its upswing, which firm would you anticipate would be likely to show the best growth in EPS over the next year? Firm A has high combined leverage and Firm B has low combined leverage. A) firm A B) firm B C) indifferent between the two D) it depends on how much financial leverage each firm has. Ans: A 9. If fixed costs rise while other variables stay constant A) the breakeven point rises. B) degree of operating leverage increases. C) total profit declines. D) all of the above Ans: D 10. Under which of the following conditions could the overuse of financial leverage be detrimental to the firm? A) stable industry B) cyclical demand for the firm's products C) upswing of business cycle low interest cost compared to return on assets D) Ans: B