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Financial and Operating Leverage Quizzes

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Financial and Operating Leverage Quizzes

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Questions and Answers

What is the formula to calculate operating leverage?

Operating Leverage = Contribution Margin / Operating Income

How do you calculate financial leverage?

Financial Leverage = 1 + (Debt / Equity)

Define the degree of operating leverage.

Degree of Operating Leverage (DOL) = % Change in EBIT / % Change in Sales

Explain the formula for combined leverage.

Combined Leverage = Operating Leverage x Financial Leverage Signup and view all the answers

Calculate the degree of operating leverage for Firm A.

2.50 Signup and view all the answers

What is the impact of a high degree of operating leverage on a company?

A high degree of operating leverage magnifies both profits and losses. Signup and view all the answers

Calculate the degree of financial leverage for Firm B.

2.00 Signup and view all the answers

Calculate the degree of combined leverage for Firm C.

3.00 Signup and view all the answers

Calculate the firm's ROI.

18% Signup and view all the answers

Does the firm have favorable financial leverage?

Yes Signup and view all the answers

If the firm's asset turnover is 2, does it have high or low asset leverage?

High Signup and view all the answers

Calculate the operating leverage for the firm.

7.00 Signup and view all the answers

Calculate the financial leverage for the firm.

2.25 Signup and view all the answers

Calculate the combined leverage for the firm.

15.75 Signup and view all the answers

If sales drop to Rs. 125 lakhs, what will be the new EBIT for the firm?

Rs. 5 lakhs Signup and view all the answers

At what level will the EBT of the firm be equal to zero?

Rs. 15 lakhs Signup and view all the answers