A) The degree of operating leverage (DOL) depends on a company's fixed costs, variable costs, and sales. The DOL formula assumes (1) that fixed costs are constant and (2) that variable costs are a constant proportion of sales.
B) The degree of total leverage (DTL) is equal to the DOL plus the degree of financial leverage (DFL) .
C) Arithmetically, financial leverage and operating leverage offset one another so as to keep the degree of total leverage constant. Therefore, the formula shows that the greater the degree of financial leverage, the smaller the degree of operating leverage.
D) For a given change in sales, the corresponding percentage change in net income could be more or less than the percentage change in operating income.
E) The degree of total leverage (DTL) is equal to the DFL divided by the degree of operating leverage (DOL) .
G) C) and D)
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A) $361,000
B) $380,000
C) $400,000
D) $420,000
E) $441,000
G) B) and C)
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A) 12.00%
B) 12.60%
C) 13.23%
D) 13.89%
E) 14.59%
G) A) and D)
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A) If sales increase 10% for both companies, then Company D will have a larger percentage increase in its net income.
B) If sales increase 10% for both companies, then Company D will have a larger percentage increase in its operating income (EBIT) .
C) If EBIT increases 10% for both companies, then Company D's net income will rise by more than 10%, while Company E's net income will rise by less than 10%.
D) Company E has a higher degree of financial leverage.
E) The two companies have the same degree of total leverage.
G) All of the above
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A) An increase in fixed costs, (holding sales and variable costs constant) will reduce the company's degree of operating leverage.
B) An increase in interest expense will reduce the company's degree of financial leverage.
C) If the company has no debt outstanding, then its degree of total leverage equals its degree of operating leverage.
D) If a firm's degree of operating leverage increases, its degree of financial leverage must also have increased.
E) If the company has no debt outstanding, then its degree of total leverage equals its degree of financial leverage.
G) A) and C)
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A) $122,482
B) $128,929
C) $135,714
D) $142,857
E) $150,000
G) A) and B)
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A) $1,083,000
B) $1,140,000
C) $1,200,000
D) $1,260,000
E) $1,323,000
G) A) and B)
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A) 4.2869
B) 4.5125
C) 4.7500
D) 5.0000
E) 5.2500
G) B) and D)
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A) 3.7500
B) 3.9375
C) 4.1344
D) 4.3411
E) 4.5581
G) None of the above
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A) The percentage change in operating income (EBIT) resulting from the change in sales will exceed the percentage change in net income.
B) The percentage change in EBIT will equal the percentage change in net income.
C) The percentage change in net income relative to the percentage change in sales (and in EBIT) will not depend on the interest rate paid on the debt.
D) The percentage change in operating income will be less than the percentage change in net income.
E) Since debt is used, the degree of operating leverage must be greater than 1.
G) C) and D)
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A) 1, 3, 5
B) 1, 2, 5
C) 2, 3, 5
D) 2, 3, 4, 5
E) 1, 2, 3, 5
G) A) and C)
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A) $16,666,667
B) $17,500,000
C) $18,375,000
D) $19,293,750
E) $20,258,438
G) A) and B)
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A) $ 92,854
B) $ 97,741
C) $102,885
D) $108,300
E) $114,000
G) C) and D)
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A) 18.80%
B) 19.79%
C) 20.83%
D) 21.92%
E) 23.08%
G) All of the above
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E
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A) $57,931
B) $60,980
C) $64,189
D) $67,568
E) $70,946
G) All of the above
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A) $5,640,625
B) $5,937,500
C) $6,250,000
D) $6,578,947
E) $6,907,895
G) C) and E)
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A) It allows decision makers a relatively clear assessment of the consequences of alternative actions.
B) It establishes the optimal capital structure for the firm.
C) It shows how a given change in leverage will affect sales.
D) It identifies, with certainty, the future net income based upon sales projections about the future.
E) None of the above statements is correct.
G) None of the above
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A) 3.1588
B) 3.3250
C) 3.5000
D) 3.6750
E) 3.8588
G) B) and D)
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A) $7.47
B) $7.86
C) $8.27
D) $8.71
E) $9.15
G) A) and B)
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D
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A) The closer the firm is operating to the breakeven quantity, the smaller the DOL.
B) A change in quantity demanded will produce the same percentage change in EBIT as an identical change in price per unit of output, other things held constant.
C) The DOL is not a fixed number for a given firm, but will depend upon the time zero values of the economic variable Q (Quantity) , P (Price) , and V (Volume) .
D) The DOL relates the change in net income to the change in operating income.
E) If the firm has no debt, the DOL will equal 1.
G) B) and D)
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C
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