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Unit 9: EBIT-EPS Analysis - Practice Quiz

EFIN542 60 Questions
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1 What does leverage generally describe in corporate finance?

Concept of Leverage Easy
A. The use of cash to eliminate all business risks
B. The use of dividends to increase total assets
C. The use of fixed costs to magnify financial results
D. The use of inventory to reduce annual sales

2 A company with high leverage generally experiences:

Concept of Leverage Easy
A. Equal changes in assets and liabilities
B. Larger changes in profits than in sales
C. No changes in profits when sales change
D. Smaller changes in profits than in sales

3 Which type of cost is the primary source of leverage?

Concept of Leverage Easy
A. Fixed cost
B. Sunk cost
C. Marginal cost
D. Variable cost

4 What is a major purpose of EBIT-EPS analysis?

Concept of Leverage Easy
A. To determine the product selling price
B. To calculate the physical inventory level
C. To prepare the annual cash budget
D. To select an appropriate financing plan

5 Which statement about leverage is correct?

Concept of Leverage Easy
A. It can magnify both gains and losses
B. It always eliminates financial risk
C. It applies only to variable expenses
D. It guarantees an increase in profit

6 Operating leverage arises mainly because of:

Operating Leverage Easy
A. Preference dividends
B. Interest on debt
C. Fixed operating costs
D. Equity share capital

7 The degree of operating leverage measures the sensitivity of:

Operating Leverage Easy
A. EBIT to changes in sales
B. Assets to changes in debt
C. EBT to changes in interest
D. Sales to changes in EPS

8 Which formula represents the degree of operating leverage?

Operating Leverage Easy
A.
B.
C.
D.

9 If contribution is and EBIT is , what is the degree of operating leverage?

Operating Leverage Easy
A.
B.
C.
D.

10 If the degree of operating leverage is and sales increase by , EBIT is expected to increase by:

Operating Leverage Easy
A.
B.
C.
D.

11 Financial leverage arises mainly because of:

Financial Leverage Easy
A. Direct material costs
B. Variable selling costs
C. Fixed financial charges
D. Fixed production costs

12 The degree of financial leverage measures the sensitivity of:

Financial Leverage Easy
A. Sales to changes in assets
B. Costs to changes in output
C. EBIT to changes in sales
D. EPS to changes in EBIT

13 When only interest is treated as a fixed financial charge, which formula represents the degree of financial leverage?

Financial Leverage Easy
A.
B.
C.
D.

14 If EBIT is and interest is , what is the degree of financial leverage?

Financial Leverage Easy
A.
B.
C.
D.

15 If the degree of financial leverage is and EBIT increases by , EPS is expected to increase by:

Financial Leverage Easy
A.
B.
C.
D.

16 Combined leverage reflects the joint effect of:

Combined Leverage Easy
A. Profit leverage and dividend leverage
B. Operating leverage and financial leverage
C. Sales leverage and production leverage
D. Debt leverage and inventory leverage

17 The degree of combined leverage measures the sensitivity of:

Combined Leverage Easy
A. EPS to changes in sales
B. Assets to changes in output
C. EBIT to changes in interest
D. Sales to changes in EPS

18 Which formula represents the degree of combined leverage?

Combined Leverage Easy
A.
B.
C.
D.

19 If operating leverage is and financial leverage is , what is combined leverage?

Combined Leverage Easy
A.
B.
C.
D.

20 If combined leverage is and sales increase by , EPS is expected to increase by:

Combined Leverage Easy
A.
B.
C.
D.

21 A company's sales increase by , causing EBIT to increase by . What does this indicate about the company's leverage?

Concept of Leverage Medium
A. Its operating leverage is
B. Its combined leverage is
C. Its financial leverage is
D. Its operating leverage is

22 A firm is considering replacing variable production costs with fixed automation costs. If expected sales remain unchanged, which effect is most likely?

Concept of Leverage Medium
A. Financial leverage will rise because automation costs are treated as interest-bearing debt obligations
B. Operating leverage will increase
C. Financial leverage will decrease
D. Combined leverage will become zero

23 Two firms have equal sales and EBIT, but Firm X has higher fixed operating costs while Firm Y has higher interest expense. Which statement is correct?

Concept of Leverage Medium
A. Firm Y has lower financial leverage
B. Firm X has greater financial leverage
C. Both firms must have equal combined leverage
D. Firm X has greater operating leverage

24 A company sells units at each. Variable cost is per unit, and fixed operating cost is . What is its degree of operating leverage?

Operating Leverage Medium
A.
B.
C.
D.

25 A firm's degree of operating leverage is . If sales are expected to increase by , what is the expected percentage increase in EBIT?

Operating Leverage Medium
A.
B.
C.
D.

26 Firm A has a degree of operating leverage of , while Firm B has a degree of operating leverage of . If sales decline by , which outcome is expected?

Operating Leverage Medium
A. Firm A's EBIT declines by
B. Firm B's EBIT declines by
C. Both firms experience the same EBIT decline because their percentage reduction in sales is identical
D. Firm A's EBIT declines by

27 A company produces units, selling each for . Variable cost is per unit, and fixed operating cost is . What is the degree of operating leverage at this output?

Operating Leverage Medium
A.
B.
C.
D.

28 A firm's contribution is . Its fixed operating costs increase from to , with contribution unchanged. How does its degree of operating leverage change?

Operating Leverage Medium
A. It rises from to
B. It remains unchanged at
C. It falls from to
D. It rises from to

29 At its current sales level, a company has contribution of and EBIT of . What is its margin of safety ratio, assuming a constant contribution margin ratio?

Operating Leverage Medium
A.
B.
C.
D.

30 A company has EBIT of and annual interest expense of . Assuming no preference dividends, what is its degree of financial leverage?

Financial Leverage Medium
A.
B.
C.
D.

31 A firm's degree of financial leverage is . If EBIT increases by , what change in EPS is expected, assuming other factors remain constant?

Financial Leverage Medium
A. An increase of
B. An increase of
C. An increase of
D. An increase of

32 Under Plan E, a company issues shares and pays no interest. Under Plan D, it issues shares and pays annual interest of . If the tax rate is identical under both plans, what is the EBIT-EPS indifference point?

Financial Leverage Medium
A.
B.
C.
D.

33 A company reports EBIT of , interest expense of , a tax rate of , and ordinary shares. What is its EPS?

Financial Leverage Medium
A.
B.
C.
D.

34 A firm has EBIT of , interest of , preference dividends of , and a tax rate of . What is its degree of financial leverage?

Financial Leverage Medium
A.
B.
C.
D.

35 A debt-financing plan and an equity-financing plan have an EBIT-EPS indifference point of . Expected EBIT is . Which plan will generally provide higher EPS?

Financial Leverage Medium
A. Both plans provide zero EPS
B. The equity plan, because issuing more shares always increases the earnings attributable to each existing ordinary share
C. The debt-financing plan
D. The equity-financing plan

36 A company has a degree of operating leverage of and a degree of financial leverage of . What is its degree of combined leverage?

Combined Leverage Medium
A.
B.
C.
D.

37 A firm's degree of combined leverage is . If sales decrease by , what is the expected change in EPS?

Combined Leverage Medium
A. A decrease of
B. A decrease of
C. A decrease of
D. A decrease of

38 A company sells units at each. Variable cost is per unit, fixed operating cost is , and interest is . What is its degree of combined leverage?

Combined Leverage Medium
A.
B.
C.
D.

39 A increase in sales causes EBIT to rise by and EPS to rise by . What are the firm's operating and financial leverage degrees?

Combined Leverage Medium
A. and
B. and
C. and
D. and

40 Firm A has and , while Firm B has and . Which comparison is correct?

Combined Leverage Medium
A. Both firms have a of
B. Both firms have identical operating and financial risk because equal combined leverage means each individual source of leverage must also be equal
C. Firm B has the lower financial leverage
D. Firm A has the higher combined leverage

41 For a small change around its current operating point, a firm's sales increase by , EBIT increases by , and EPS increases by . Assuming its cost structure and financing remain unchanged, which leverage profile is implied?

Concept of Leverage Hard
A. , , and
B. , , and
C. , , and
D. , , and

42 A company sells units at each. Variable cost is per unit, and its degree of operating leverage at this output is . What is the company's fixed operating cost?

Operating Leverage Hard
A.
B.
C.
D.

43 A firm sells units of Product A with a unit contribution and units of Product B with a unit contribution. Fixed operating cost is . If total unit sales remain but the mix changes to units of each product, what is the degree of operating leverage at the new mix?

Operating Leverage Hard
A. Undefined because the firm is at operating break-even
B. , based on the new weighted-average contribution margin relative to the original operating profit
C.
D.

44 A company has sales of , variable cash costs equal to of sales, fixed cash operating costs of , and depreciation of . What is its accounting degree of operating leverage?

Operating Leverage Hard
A.
B.
C.
D.

45 At its current sales level, a single-product firm has a degree of operating leverage of . Unit price, unit variable cost, and fixed operating cost remain constant. If unit sales decline by without crossing any capacity threshold, what percentage of the original EBIT will remain?

Operating Leverage Hard
A.
B.
C.
D.

46 A firm has EBIT of , annual interest of , preferred dividends of , and a tax rate of . What is its degree of financial leverage?

Financial Leverage Hard
A.
B.
C.
D.

47 Under a debt plan, a company would have common shares and of annual interest. Under an equity plan, it would have common shares and of annual interest. The tax rate is , and there are no preferred dividends. At what EBIT are the plans EPS-indifferent?

Financial Leverage Hard
A.
B.
C.
D.

48 A firm with no taxes or preferred stock has EBIT of and interest expense of . Using percentage change relative to the original EPS, what does its degree of financial leverage indicate for a increase in EBIT?

Financial Leverage Hard
A. EPS rises by because interest is fixed
B. EPS rises by because the loss becomes smaller
C. EPS falls by because the original EPS is negative
D. EPS falls by because EBIT remains below interest

49 A firm expects constant EBIT of and currently pays of annual interest. It has no preferred stock and requires . If additional debt carries a annual interest rate, what is the maximum additional debt it can issue?

Financial Leverage Hard
A.
B.
C.
D.

50 A company has EBIT of , interest of , and preferred dividends of . If its tax rate rises from to while all other amounts remain constant, how does DFL change?

Financial Leverage Hard
A. It increases from to
B. It decreases from to
C. It remains constant at because tax rates never affect financial leverage
D. It increases from to

51 A firm sells units with a contribution margin of per unit. At this volume, and . There are no preferred dividends. Which combination of fixed operating cost, interest expense, and expected EPS response to a unit-sales increase is correct?

Combined Leverage Hard
A. fixed cost, interest, and a EPS increase
B. fixed cost, interest, and a EPS increase
C. fixed cost, interest, and an EPS increase
D. fixed cost, interest, and a EPS increase

52 A corporation has sales of , a contribution margin ratio of , fixed operating costs of , interest of , preferred dividends of , and a tax rate of . What is its degree of combined leverage?

Combined Leverage Hard
A.
B.
C.
D.

53 At its current output, a company has , , and EBIT of . It has no preferred stock. What is its annual interest expense?

Combined Leverage Hard
A.
B.
C.
D.

54 A firm has current sales of , a contribution margin ratio of , fixed operating costs of , and interest expense of . It has no preferred stock. Assuming the linear cost structure remains valid, what sales decline would reduce EPS to zero?

Combined Leverage Hard
A.
B.
C.
D.

55 A company reports a point degree of operating leverage of immediately below its plant-capacity limit. A proposed sales increase would require a new block of fixed operating costs. Which interpretation is valid?

Concept of Leverage Hard
A. The DOL guarantees EBIT will rise by exactly , even though the expansion introduces a new block of fixed operating costs
B. The DOL is local; endpoint EBIT should be used for the large change
C. The DOL automatically becomes after capacity expands
D. The DOL remains exactly for any feasible sales change

56 A profitable firm has variable operating costs but no fixed operating costs, interest, or preferred dividends. Assuming a positive contribution margin, what are its leverage degrees?

Concept of Leverage Hard
A. , , and
B. , , and
C. , , and
D. , , and

57 A company has contribution of and fixed operating costs of . If sales rise by with a constant contribution margin ratio, how should its be interpreted?

Concept of Leverage Hard
A. EBIT rises by in both dollar and percentage terms because negative leverage must be converted to its absolute value
B. The operating loss grows by because fixed costs remain unchanged
C. EBIT falls by because contribution declines
D. The operating loss shrinks, but EBIT's percentage change is relative to its negative base

58 At a particular sales level, a firm's contribution is , EBIT is zero, and interest is . There are no preferred dividends. Which statement correctly describes leverage at this point?

Concept of Leverage Hard
A. DCL is ; both component leverage degrees must therefore be treated as zero
B. DCL is ; the product is indeterminate at that point
C. DCL is undefined because zero EBIT necessarily makes operating, financial, and combined leverage unusable for every sensitivity calculation
D. DCL is ; leverage degrees use absolute values whenever EBIT is zero

59 A firm sells units at each, with variable cost of per unit and fixed operating costs of . Sales above units require an additional of fixed cost. What is the actual percentage change in EBIT if unit sales increase by ?

Operating Leverage Hard
A.
B.
C.
D.

60 Design A has a unit contribution of , fixed operating costs of , interest of , and shares. Design B has a unit contribution of , fixed operating costs of , interest of , and shares. Both face the same tax rate and no preferred dividends. At approximately what unit volume are their EPS values equal, and which design has higher EPS above that volume?

Combined Leverage Hard
A. units; Design B is superior above that volume
B. units; Design A is superior above that volume
C. units; Design B is superior above that volume
D. units; Design A is superior above that volume
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