Reading 46: Measures of Leverage-LOS a 习题精选 2011, business, center, higher, style

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Session 11: Corporate Finance
Reading 46: Measures of Leverage

LOS a: Define and explain leverage, business risk, sales risk, operating risk, and financial risk, and classify a risk, given a description.

 

 

All else equal, a firm's business risk is higher when:

A) fixed costs are the highest portion of its expense.

B) the firm has low operating leverage.

C) variable costs are the highest portion of its expense.

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The higher the percentage of a firm's costs that are fixed, the higher the operating leverage, and the greater the firm's business risk and the more susceptible it is to business cycle fluctuations.

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Which of the following statements about business risk and financial risk is least accurate?

A) The greater a company's business risk, the higher its optimal debt ratio.

B) Business risk is the riskiness of the company's assets if it uses no debt.

C) Factors that affect business risk are demand, sales price, and input price variability.

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The greater a company’s business risk, the lower its optimal debt ratio.

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Variability in a firm’s operating income is most closely related to its:

A) business risk.

B) internal risk.

C) financial risk.

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Business risk is the uncertainty regarding the operating income of a company. Financial risk refers to the uncertainty caused by the fixed cost associated with borrowed money.

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Which of the following factors is least likely to affect business risk?

A) Demand variability.

B) Interest rate variability.

C) Operating leverage.

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Business risk can be defined as the uncertainty inherent in a firm’s return on assets (ROA). While changes in interest rates may impact the demand or input prices, there is a more direct impact on business risk with the other three choices.

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Hughes Continental is assessing its business risk. Which of the following factors would least likely be considered in the analysis?

A) Input price variability.

B) Debt-equity ratio.

C) Unit sales levels.

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The main factors affecting business risk are demand variability, sales price variability, input price variability, ability to adjust output prices, and operating leverage. Debt levels affect financial risk, not business (operating) risk.

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Financial risk is borne by:

A) creditors.

B) managers.

C) common shareholders.

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Common shareholders are the residual owners of the company. As such, they experience the benefits of above-normal gains in good times and the pain of losses when the business is in a slow period. Financial leverage magnifies the variability of earnings per share due to the existence of the required interest payments.

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The two major types of risk affecting a firm are:

A) financial risk and cash flow risk.

B) business risk and financial risk.

C) business risk and collection risk.

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Business risk is the uncertainty regarding the operating income of a company. Financial risk refers to the uncertainty caused by the fixed cost associated with borrowed money.

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The uncertainty in return on assets due to the nature of a firm’s operations is known as:

A) financial leverage.

B) business risk.

C) tax efficiency.

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Business risk is a function of the firm's revenue and expenses, resulting in operating income, or earnings before interest and taxes (EBIT). The main factors affecting business risk are demand variability, sales price variability, input price variability, ability to adjust output prices, and operating leverage. Tax efficiency is tied to mutual fund investing, while financial leverage requires the existence of debt.