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LOS c: Characterize the operating leverage, financial leverage, and total leverage of a company given a description of it.
Q1. Which of the following best describes a firm with low operating leverage? A large change in:
A) earnings before interest and taxes result in a small change in net income.
B) sales result in a small change in net income.
C) the number of units a firm produces and sells result in a similar change in the firm’s earnings before interest and taxes.
Q2. NG Inc. is thinking about issuing new common stock. Given the following information, what would be NG’s cost of issuing new common stock?
- Beta of common stock = 1.10
- Risk-free rate = 3.5%
- Expected return on the stock market = 8.0%
- Marginal tax rate = 40%
A) 9.60%.
B) 8.45%.
C) 5.10%.
Q3. Financial leverage would NOT be increased if a firm financed its next project with:
A) common stock.
B) preferred stock.
C) bonds with embedded call options.
Q4. Which of the following events would decrease financial leverage?
A) Paying dividends.
B) Issuing debt to purchase assets.
C) Issuing common stock to purchase assets.
Q5. Which of the following financial statement effects is most likely associated with an increase in financial leverage?
A) Increased operating expenses.
B) Increased revenue.
C) Increased liabilities.
Q6. Which of the following types of firms is most likely to have a high degree of operating leverage?
A) A firm that develops and sells complex software.
B) A fine clothing retailer.
C) A restaurant. | 
发表于 2009-3-4 10:23
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