MULTIPLE CHOICE
1.Investment decisions are important to a company because they
a.always result in higher profits
b.lessen the impact of merger and acquisition decisions
c.increase the degree of financial leverage that a company is employing at a given point in time
d.commit management to a course of action regarding financing and operating activities
2.A company’s use of fixed costs to increase net income as sales increase is known as
a.financial leverage
b.operating leverage
c.fiscal leverage
d.efficiency leverage
3.A company can reduce the volatility of its profits that generated from fluctuating levels of sales by
a.increasing financial leverage
b.increasing operating leverage
c.decreasing operating leverage
d.investing in riskier projects
4.The concept of operating leverage differs from that of financial leverage in that operating leverage is affected by
Whether assets are The type (or mix) of fixed
financed by debt or equity assets held by the firm
a.Yes Yes
b.Yes No
c.No Yes
d.No No
5.The relationship of a firm's fixed costs relative to its variable costs yields information about its
a.degree of financial leverage
b.degree of operating leverage
c.degree of earnings leverage
d.degree of both financial and operating leverage
6.Solo Company has a higher ratio of fixed to variable costs than Luna Company. The sales revenues of both companies increased by 10%. If the firms are similar in size and product mix, you would expect Solo Company's
a.expenses to increase more rapidly than Luna Company's
b.expenses to decrease while Luna Company's increase
c.net income to decrease while Luna Company's increase
d.net income to increase more rapidly than Luna Company's
7.Sylvester Company has a lower ratio of fixed to variable costs than Tweety Company. The sales revenues of both companies increased by 10%. If the firms are similar in sizeand product mix, you would expect Sylvester's
a.expenses to increase more rapidly than Tweety's
b.expenses to decrease while Tweety's increase
c.net income to decrease while Tweety's increase
d.net income to increase more rapidly than Tweety's
8.If 80% of a certain firm's assets are invested in plant, machinery and other long-term assets, then one would also expect this firm to have a high level of
a.operating leverage
b.financial leverage
c.return on assets
d.debt
9.Operating leverage affects a company's return on
a.assets and return on equity
b.assets but not return on equity
c.equity but not return on assets
d.equity less than its return on assets
10.Which of the following statements is TRUE concerning financial leverage and operating leverage?
a.financial leverage is helpful to a firm whereas operating leverage is not
b.financial leverage increases a firm's risk whereas operating leverage does not
c.financial leverage benefits a company most at high sales volumes while operating leverage benefits a company most at low sales volumes
d.financial leverage is a measurement of financing choices whereas operating leverage is a measurement of cost structure choices