ch 4b, 5 & 6
Quiz yourself by thinking what should be in
each of the black spaces below before clicking
on it to display the answer.
Help!
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| The contribution margin per unit is equal to price per unit minus fixed costs per unit. | False: CM/U = P - VC
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| Financial leverage influences the top half of the income statement while operating leverage deals with the bottom half. | False: DFL & DOL have no bearing on the income statement
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| The degree of combined leverage is the degree of operating leverage times the degree of financial leverage. | True: DOL x DFL = DCL
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| Operating leverage determines how income from operations is to be divided between debt holders and shareholders. | False: DOL has no bearing on how income is to be divided
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| As the contribution margin rises, the break-even point goes up. | False: CM = P-VC has no bearing on BEP
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| The degree of financial leverage measures the percentage change in EAT for every 1 percent move in EBIT | True: DFL = EBIT/EBT
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| If fixed operating costs rise while other variables stay constant | The degree of operating leverage increases
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| When a firm has no debt | It has a financial leverage of one
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| Firm A has a high combined leverage and Firm B has a low combined leverage. If the business cycle were just beginning an upswing (sales increasing), which firm would you anticipate would likely to show better growth in EPS over the next year? | Firm A
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| DOL | = CM/EBIT
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| DFL | = EBIT/EBT
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| DCL | = DOL x DFL
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| Using the appropriate leverage multiplier, calculate the dollar amount of EAT if sales increased by 10% | 10% x DCL= X
EAT x (1 + X)= new EAT
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| CMR | = CM/Sales
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| BEP | = Fixed costs + Interest Expense/CMR
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| RNF | (Total Assets - Current Liabilities) x % sales increase - Retained Earnings.
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| % sales increase | New sales - Old sales / Old sales
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| Retained Earnings | last year profit x ( 1 + % sales increase) - Dividends
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| Calculate Debt Financing Required | Current Assets + Capital Assets = Total Assets,
Total Assets - Financing with Equity =
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| How do you tell if a plan is riskier than another when financing with ST & LT | The plan with a higher debt from ST financing would be riskier and more aggressive than the other
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