Explain how profits or losses can be magnified for a firm with high operating leverage as opposed to a firm with lower operating leverage
Q: Changes in sales cause changes in profits. Would the profit change associated with sales changes be…
A: Introduction: Operating leverage refers to the application of both fixed and variable costs to make…
Q: price-earnings ratio that is higher than other similar firms
A: A high price-earning ratio implies more price has to be paid for acquiring the stocks of the firm…
Q: 3. How does operating leverage impact the operating risk and profit levels of a company?
A: Operating leverage measures the percentage increase in operating income which is a result of change…
Q: A company that finances a relatively large portion of its assets with liabilities is said to have a…
A: Leverage: Leverage is a method of using of debt in an efficient way so that it can be used to…
Q: An increase in a firm's leverage ratio O A. tends to decrease the expected profit per unit of…
A: The financial leverage ratio is the amount of debt a company has compared to its total capital. The…
Q: Which of the following statements about operating leverage is false?
A: The answer for the multiple choice question and relevant explanation are presented hereunder :
Q: If a firm increases its use of both operating and financial leverage, then you should expect the…
A: Operating Leverage: Increasing operating income by increasing revenue is a cost-accounting formula…
Q: Which of the following situations is most likely to pose a problem for companies that use return on…
A: Return on investment is computed as the average return generated dividend by the investment made in…
Q: Which of the following statements about operating leverage is false? O a. If the degree of operating…
A: Answer
Q: The cost of retained earnings have the lowest weight in computation of the weighted average cost of…
A: correct answer is (a) The cost of retained earnings have the lowest weight in computation of the…
Q: Explain how acquiring a firm with past losses can be beneficial.
A: The acquisition is a strategic move that a business entity adopts with the aim to acquire the…
Q: Can you please give some examples of firms whereby a positive relationship exists between operating…
A: Leverage: The term leverage, in general, refers to a relationship between two interrelated…
Q: What are the two fixed financial costs most commonly found on the firm’s income statement in respect…
A: In finance, the term “leverage” represents use of outsiders’ funds to finance capital assets of the…
Q: What does it mean if the companies operating leverage is higher or lower than another company!
A: Operating leverage is used to determine the efficiency of the firm to utilize fixed operating…
Q: If a firm is using financial leverage successfully, the ROE should be a. higher than the profit…
A: Answer is option b) Higher than ROA Financial leverage = Earnings Before Interest and Taxes /…
Q: Would the profit change associated with sales changes be larger or smaller if a firm increased its…
A: Operating leverage refers to fixed cost level associated to the operations of a company. A company…
Q: How can an unlevered firm uptain financial leverage
A: Unlevered firm is a firm with no debt in its capital structure. It does not have any financial…
Q: Which of the following is NOT related to (or contributes to) business risk? Remember that a…
A: Business risk refers to a company's or organization's vulnerability to factors that could reduce…
Q: Suppose a company’s return on invested capital is less than itsWACC. What happens to the value of…
A: When the company’s ROIC is below the WACC, it indicates that the value is destroyed because the…
Q: Indicate the correct statements: The solvency margin of a company is represented by the capital…
A: Solvency margin is the difference between assets and liabilities i.e., the excess of assets over…
Q: What is the concept of operating leverage? Describe a scenario where a high degree of operating…
A: Solution- Operating leverage is the a degree to which a firm uses variable and fixed costs in…
Q: company's Degree of Financial Leverage (DFL) is primarily influenced by decisions about:…
A: Financial leverage indicates how business is depending on its debt.
Q: The difference between the market value of the firm and the amount of money invested in the firm is…
A: An investor takes into consideration the market value of the company to decide whether investment…
Q: Which of the following is a valid reason for a firm not to use as much debt as it can raise? Group…
A: The use of more debt results in an increase in the firm's cost of capital as the proportion of…
Q: Which of the following statements is correct? a. An increase in a firm’s inventories will call for…
A: Financial ratio is referred to as the relative magnitude for the two selected numerical values,…
Q: What is the implication of managerial entrenchment: should company favor debt or equity? Why?
A: Managerial entrenchment theory-says that allotment of shares inside the organization such as…
Q: Which of the following statements is CORRECT?
A: The capital structure simply refers to the make-up of capitalization or long-term capital of a…
Q: The business risk of a company is most accurately measured by the company's: a. Debt-to-equity…
A: Bussiness risk consists uncertainty of sales and profits and other production related uncertainty.
Q: A firm with a high degree of operating leverage: " will have a more significant shift in income as…
A: Degree of Operating Leverage is a relation of contribution margin to the net income. Contribution…
Q: performance
A: The term financial leverage refers to the amount of debt that is used by the company in order to…
Q: Explain and give an example as to how a manager can manipulate the return on investment figure in…
A: Return on Investment The profit or loss received by an investor on investing a particular amount in…
Q: Dupont Identity of this company Dupont: ROE = Profit Margin * Asset Turnover * Financial Leverage…
A: DuPont ROE According to DuPont analysis, ROE is calculated as shown below. ROE=Profit margin×Asset…
Q: If a company chooses to minimize WACC, what will be the effect on financial flexibility
A: Basic Terms :- Financial flexibility of the firm is the ability of the firm's capital structure to…
Q: Indicate whether its TRUE or FALSE. Then provide a complete explanation! Financial risk is…
A: We’ll answer the first question since the exact one wasn’t specified. Please submit a new question…
Q: Which of the following is concerned with the relationship between the firm's EBIT and EPS? * a.…
A: Solution: Degree of financial leverage (DFL) is a ratio that measures the sensitivity of a earnings…
Q: Which of the following statements about operating leverage is false? O a. If the degree of operating…
A: Operating Leverage = %change in EBIT / % change in sales
Q: Which of the following statements about operating leverage is false? O a. Keeping all factors…
A: Operating leverage: It is a cost account accounting method or technique used by the firm to measure…
Q: Under which of the following conditions could the overuse of financial leverage be detrimental to…
A: Financial leverage is more use of debt which continous payment of interest rather than issues of…
Q: Empirical evidence indicates that the returns to shareholders of the target firm vary significantly…
A: According to Empirical evidence, the shareholders of the taget firm have the advantage of earning…
Q: Briefly explain the tradeoff hypothesis and how it is related to the long-run survival of a firm? “…
A: Leverage means the use of fixed costs, the firm increases manifold or levers up its…
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- What do you think is the relationship between a firm’s operating leverage and its financial leverage? Do you think the two measures are positively correlated, negatively correlated, or unrelated? Explain your answer.Can you please give some examples of firms whereby a positive relationship exists between operating leverage and financial leverage?Under which of the following conditions could the overuse of financial leverage be detrimental to the firm? Multiple Choice In a stable industry. When there is cyclical demand for the firm's products. During an upswing in the business cycle. When there is low interest cost compared to return on assets.
- The financial leverage implications for company performance?how to assess a company's success in using leverage to increase returns?If a firm is using financial leverage successfully, the ROE should be a. higher than the profit margin b. higher than ROA c. lower than if no leverage were used d. higher than if no leverage were used
- Which of the following statements about operating leverage is false? a. Operating leverage measures how operating income will be affected by changes in sales b. The degree of operating leverage is higher for companies with lower fixed costs c. Keeping all factors constant, the higher the contribution margin, the higher the operating leverage. d. All of the given answers are true. e. If the degree of operating leverage higher for a company, this means that the company is more risky than another company with low degree of operating leverage.Briefly explain the tradeoff hypothesis and how it is related to the long-run survival of a firm? “ One type of leverage affects both EBIT and EPS. The other type affects only EPS”. Explain this statement.Evaluate the effect of gearing on cost of capital and firm value taking intoconsideration the introduction of gearing or leverage increases cost of equity as a result of shareholders exposure to financial distress risk.
- A company's Degree of Financial Leverage (DFL) is primarily influenced by decisions about: Automation Increasing or decreasing sales volume Issuing bonds versus common shares The addition of fixed costs to operationsThe financial leverage implications for company analysis?What make ROE(return on equity) of a company decrease further into negatives even though their financial leverage starts to rises? If a company multiplier for financial leverage starts to rise, what does it implies? Why?