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Raw material and direct labor costs are examples of
Raw material and direct labor costs are examples of
The percentage change in a firm's EBIT that results in a 1% change in sales or output is known as the
The percentage change in a firm's EBIT that results in a 1% change in sales or output is known as the
The total variability of the firm's EPS associated with a change in sales is an indication of combined leverage and is best measured by
The total variability of the firm's EPS associated with a change in sales is an indication of combined leverage and is best measured by
In the analysis of financial leverage, all of the following are referred to as fixed charges except:
In the analysis of financial leverage, all of the following are referred to as fixed charges except:
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Rent, insurance, and the salaries of top management are examples of:
Rent, insurance, and the salaries of top management are examples of:
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A firm that employs relatively large amounts of labor-saving equipment in its operations will have a relatively ______ degree of operating leverage.
A firm that employs relatively large amounts of labor-saving equipment in its operations will have a relatively ______ degree of operating leverage.
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A firm that employs a relatively large proportion of debt and preferred stock in its capital structure will have a relatively ______ degree of financial leverage.
A firm that employs a relatively large proportion of debt and preferred stock in its capital structure will have a relatively ______ degree of financial leverage.
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The degree of combined leverage is equal to the ______ multiplied by the ______
The degree of combined leverage is equal to the ______ multiplied by the ______
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To balance the operating and financial risks that are so variable for a multinational company, Nestle allows its foreign operating subsidiaries ______ operational flexibility and follows a ______ financing strategy.
To balance the operating and financial risks that are so variable for a multinational company, Nestle allows its foreign operating subsidiaries ______ operational flexibility and follows a ______ financing strategy.
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The degree of financial leverage is defined as the percentage change in
The degree of financial leverage is defined as the percentage change in
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Cash insolvency analysis evaluates the adequacy of a firm's cash position in a
Cash insolvency analysis evaluates the adequacy of a firm's cash position in a
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A negative DOL indicates the percentage ______ in operating losses that occurs as the result of a 1% increase in output.
A negative DOL indicates the percentage ______ in operating losses that occurs as the result of a 1% increase in output.
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A negative DOL indicates the percentage in operating losses that occurs as the result of a 1% increase in output.
A negative DOL indicates the percentage in operating losses that occurs as the result of a 1% increase in output.
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The use of increasing amounts of combined leverage____ the risk of financial distress.
The use of increasing amounts of combined leverage____ the risk of financial distress.
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A firm is said to be if it is unable to meet its current obligations.
A firm is said to be if it is unable to meet its current obligations.
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When fixed operating costs are incurred by the firm, a change in____ change in earnings before interest and taxes.
When fixed operating costs are incurred by the firm, a change in____ change in earnings before interest and taxes.
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When fixed capital costs are incurred by the firm, a change in____is magnified into a larger change in earnings per share.
When fixed capital costs are incurred by the firm, a change in____is magnified into a larger change in earnings per share.
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The degree of combined leverage is defined as the percentage change in earnings per share resulting from a given percentage change in
The degree of combined leverage is defined as the percentage change in earnings per share resulting from a given percentage change in
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The degree of combined leverage is equal to the degree of operating leverage___ the degree of financial leverage.
The degree of combined leverage is equal to the degree of operating leverage___ the degree of financial leverage.
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An analytical technique called____ can be used to help determine when debt financing is advantageous and when equity financing is advantageous.
An analytical technique called____ can be used to help determine when debt financing is advantageous and when equity financing is advantageous.
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Financial leverage causes a firm’s____ to change at a rate greater than the change in____ .
Financial leverage causes a firm’s____ to change at a rate greater than the change in____ .
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In EBIT-EPS analysis, the indifference point is found at the point where for the two alternative financing plans are equal.
In EBIT-EPS analysis, the indifference point is found at the point where for the two alternative financing plans are equal.
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What type of security is used to purchase a target company in a leveraged buy-out?
What type of security is used to purchase a target company in a leveraged buy-out?
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A change in EBIT is magnified into a larger change in EPS. This means that financial leverage is using____ as its fulcrum.
A change in EBIT is magnified into a larger change in EPS. This means that financial leverage is using____ as its fulcrum.
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There are three categories of costs: fixed costs, variable costs and semi-variable costs. Which of the following is a semi-variable cost?
There are three categories of costs: fixed costs, variable costs and semi-variable costs. Which of the following is a semi-variable cost?
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Some companies use debt or preferred stock financing instead of common stock financing. The purpose is:
Some companies use debt or preferred stock financing instead of common stock financing. The purpose is:
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In evaluating degree of operating leverage, it is best that the firm’s DOL is
In evaluating degree of operating leverage, it is best that the firm’s DOL is
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Study Notes
Capital Structure Management in Practice
- Capital Structure: Raw materials and direct labor costs are variable costs
- Fixed Operating Costs: A change in sales revenue is magnified into a larger change in earnings before interest and taxes (EBIT)
- Fixed Capital Costs: A change in earnings before interest and taxes (EBIT) is magnified into a larger change in earnings per share (EPS)
- Degree of Operating Leverage: The percentage change in EBIT that results from a 1% change in sales
- Degree of Financial Leverage: The percentage change in earnings per share (EPS) that results from a 1% change in EBIT
- Degree of Combined Leverage: The total variability of the firm's earnings per share (EPS) associated with a change in sales
- Fixed Costs: Include raw materials, direct labor, and other costs that don't change with the level of production
- Variable Costs: Costs that vary directly with the level of production, like raw materials or direct labor
- Combined Leverage: It's the degree of operating leverage multiplied by the degree of financial leverage
- Financial Leverage: Ratio of debt financing to equity financing, amplifying returns for shareholders but increasing risk
- Operating Leverage: Leveraging sales volume to influence earnings before interest and tax (EBIT). A business model with high proportion of fixed costs has high operating leverage.
Fixed Charges
- Bond Interest: Interest expenses on bonds are considered fixed charges in financial leverage analysis.
- Bank Interest: Interest expenses on bank loans are considered fixed charges in financial leverage analysis.
- Preferred Stock Dividends: Paid regularly to preferred stockholders are considered fixed charges in financial leverage analysis.
- Common Stock Dividends: Not considered a fixed charge, as they are not consistent.
Financial Leverage
- Financial Leverage: The degree of financial leverage (DFL) is the percentage change in EPS resulting from a percentage change in EBIT.
- High financial leverage: Increase in the risk of financial distress, a large proportion of debt in a company's capital structure creates risk.
Cash Management
- Cash Insolvency: A firm is unable to meet its current obligations, also known as a state of financial distress
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Description
Test your knowledge on capital structure management, focusing on the concepts of operating and financial leverage. This quiz covers the impact of fixed and variable costs on earnings and explores the degrees of leverage within a firm. Enhance your understanding of how changes in sales can affect a firm's financial health.
