Question 1

The percentage change in earnings before interest and taxes (EBIT) associated with a given percentage change in sales is known as the degree of _____ leverage.

Accepted Answer

A) financial 
B) total 
C) operating 
D) combined 
E) equity 
A) financial 
B) total 
C) operating 
D) combined 
E) equity C

Question 2

On-The-Go Merchandiser sells luxury carry-on travel bags for $1,200 each. The firm's fixed operating costs are $600,000 when 5,000 or fewer bags are produced, and its variable cost ratio is 80 percent (i.e., variable cost per unit is 80 percent of the selling price). What is On-The-Go's operating breakeven point?

Accepted Answer

A) 500 bags 
B) 6,000 bags 
C) 750 bags 
D) 2,500 bags 
E) 4,000 bags 
A) 500 bags 
B) 6,000 bags 
C) 750 bags 
D) 2,500 bags 
E) 4,000 bags D

Question 3

Suppose a firm's degree of financial leverage (DFL) is 1.0. Which of the following statements concerning this firm is correct?

Accepted Answer

A) The firm must have fixed costs associated with its production process. 
B) The firm's earnings per share (EPS) must equal zero. 
C) The firm's degree of total leverage (DTL) must equal 1.0. 
D) The firm's degree of operating leverage (DOL) must be greater than 1.0. 
E) The firm has no long-term debt, preferred stock, or other sources of financing that require fixed payments. 
A) The firm must have fixed costs associated with its production process. 
B) The firm's earnings per share (EPS) must equal zero. 
C) The firm's degree of total leverage (DTL) must equal 1.0. 
D) The firm's degree of operating leverage (DOL) must be greater than 1.0. 
E) The firm has no long-term debt, preferred stock, or other sources of financing that require fixed payments. E

Question 4

Which of the following is the first step involved in constructing pro forma financial statements?

Accepted Answer

A) Forecasting the next period's balance sheet. 
B) Determining the additional funds needed (AFN) to support expected growth. 
C) Forecasting the income statement. 
D) Determining financing feedbacks. 
E) Computing the firm's operating breakeven point. 
A) Forecasting the next period's balance sheet. 
B) Determining the additional funds needed (AFN) to support expected growth. 
C) Forecasting the income statement. 
D) Determining financing feedbacks. 
E) Computing the firm's operating breakeven point.

Question 5

Which of the following statements concerning the financial breakeven point, EBITFinBEP, is correct?

Accepted Answer

A) The financial breakeven point determines the impact of a firm's financing mix on its earnings per share (EPS). 
B) The financial breakeven point determines the level of sales a new product must achieve to be profitable. 
C) The financial breakeven point determines the effects of a general expansion in the level of a firm's operations. 
D) The financial breakeven point analyzes the consequences of purchasing modernization projects that require increase investments in fixed assets. 
E) The financial breakeven point represents the level of production and sales at which net operating income equals zero. 
A) The financial breakeven point determines the impact of a firm's financing mix on its earnings per share (EPS). 
B) The financial breakeven point determines the level of sales a new product must achieve to be profitable. 
C) The financial breakeven point determines the effects of a general expansion in the level of a firm's operations. 
D) The financial breakeven point analyzes the consequences of purchasing modernization projects that require increase investments in fixed assets. 
E) The financial breakeven point represents the level of production and sales at which net operating income equals zero.

Question 6

If a firm that has a degree of operating leverage (DOL) greater than 1.0 experiences a 1.0 percent change in _____, its earnings before interest and taxes (EBIT) will change by  .0 percent.

Accepted Answer

A) earnings per share; greater than 
B) net income; greater than 
C) net operating income; less than 
D) sales; greater than 
E) fixed costs; less than 
A) earnings per share; greater than 
B) net income; greater than 
C) net operating income; less than 
D) sales; greater than 
E) fixed costs; less than

Question 7

To compute the additional funds (AFN) the firm must raise using external financing sources to support a particular level of forecasted operations, the firm should _____.

Accepted Answer

A) subtract the funds it expects to generate spontaneously from the forecasted sales 
B) subtract the forecasted operating costs from its existing total liabilities 
C) add the funds it expects to generate internally to the funds it expects to generate spontaneously 
D) subtract the funds it expects to generate internally from the funds that are required to attain the forecasted sales 
E) add the funds that it expects to generate spontaneously to its existing retained earnings balance 
A) subtract the funds it expects to generate spontaneously from the forecasted sales 
B) subtract the forecasted operating costs from its existing total liabilities 
C) add the funds it expects to generate internally to the funds it expects to generate spontaneously 
D) subtract the funds it expects to generate internally from the funds that are required to attain the forecasted sales 
E) add the funds that it expects to generate spontaneously to its existing retained earnings balance

Question 8

Citation Manufacturing produces electronic components that sell for $600 each. The fixed production costs are $720,000 when 30,000 or fewer components are produced, and variable production costs are $510 per component. What is Citation's operating breakeven point?

Accepted Answer

A) 8,000 components 
B) 1,200 components 
C) 1,412 components 
D) $720,000 in sales 
E) $389,189 in sales 
A) 8,000 components 
B) 1,200 components 
C) 1,412 components 
D) $720,000 in sales 
E) $389,189 in sales

Question 9

Marcus Corporation currently sells 150,000 units per year at a price of $4.00 a unit. Its variable costs are 30 percent of sales, and its fixed operating costs are $300,000. What is Marcus's degree of operating leverage (DOL) at sales equal to 150,000 units?

Accepted Answer

A) 1.4× 
B) 2.2× 
C) 3.5× 
D) 2.0× 
E) 5.0× 
A) 1.4× 
B) 2.2× 
C) 3.5× 
D) 2.0× 
E) 5.0×

Question 10

Which of the following statements concerning the degree of total leverage (DTL) is correct?

Accepted Answer

A) DTL is the percentage change in earnings per share (EPS) that results from a given percentage change in earnings before interest and taxes (EBIT). 
B) It is the level of earnings before interest and taxes (EBIT) at which earnings per share (EPS) equals zero. 
C) DTL is the percentage change in net operating income (NOI) (earnings before interest and taxes) associated with a given percentage change in sales. 
D) DTL represents the level of production and sales at which net operating income is zero. 
E) DTL is the percentage change in earnings per share (EPS) that results from a 1 percent change in sales. 
A) DTL is the percentage change in earnings per share (EPS) that results from a given percentage change in earnings before interest and taxes (EBIT). 
B) It is the level of earnings before interest and taxes (EBIT) at which earnings per share (EPS) equals zero. 
C) DTL is the percentage change in net operating income (NOI) (earnings before interest and taxes) associated with a given percentage change in sales. 
D) DTL represents the level of production and sales at which net operating income is zero. 
E) DTL is the percentage change in earnings per share (EPS) that results from a 1 percent change in sales.

Question 11

If a firm that has fixed costs in its operations does not meet its forecasted sales level, its operating leverage will result in a magnified decrease in net income compared to what is expected.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements concerning lumpy assets is correct?

Accepted Answer

A) Purchasing lumpy assets generally does not have a significant effect on the amount of fixed assets a firm holds. 
B) Lumpy assets normally are extremely liquid. 
C) If it can only purchase lumpy assets, it is possible that a firm will be required to invest a substantial amount in plant and equipment to attain a small projected increase in sales. 
D) Lumpy assets can be acquired in small increments. 
E) Lumpy assets generally have lives that are less than 12 months. 
A) Purchasing lumpy assets generally does not have a significant effect on the amount of fixed assets a firm holds. 
B) Lumpy assets normally are extremely liquid. 
C) If it can only purchase lumpy assets, it is possible that a firm will be required to invest a substantial amount in plant and equipment to attain a small projected increase in sales. 
D) Lumpy assets can be acquired in small increments. 
E) Lumpy assets generally have lives that are less than 12 months.

Question 13

When economies of scale exist, a firm's _____ ratio is likely to decrease if the size of the firm increases substantially.

Accepted Answer

A) days sales outstanding 
B) total assets turnover 
C) variable cost of goods sold 
D) times interest earned 
E) price earnings (P/
E)  
A) days sales outstanding 
B) total assets turnover 
C) variable cost of goods sold 
D) times interest earned 
E) price earnings (P/
E)

Question 14

Deviations of actual sales from projected sales should be evaluated to determine how to improve future forecasts and the predictability of future operations, and therefore to ensure that the goals of the firm are being pursued appropriately.

Accepted Answer

A) True 
 B)False

Question 15

When forecasting income statements, which of the following is generally a key assumption firms make about their variable operating costs?

Accepted Answer

A) Variable operating costs remain the same each year. 
B) Variable operating costs increase at the same rate as sales. 
C) Variable operating costs are forecast to be the average of the operating costs during the previous three years. 
D) Variable operating costs decrease when sales increase. 
E) Variable operating costs are set at industry averages. 
A) Variable operating costs remain the same each year. 
B) Variable operating costs increase at the same rate as sales. 
C) Variable operating costs are forecast to be the average of the operating costs during the previous three years. 
D) Variable operating costs decrease when sales increase. 
E) Variable operating costs are set at industry averages.

Question 16

Current liabilities accounts that change "naturally" with changes in sales provide funds that tend to change at the same rate as sales. These funds are referred to as ______ funds.

Accepted Answer

A) spontaneously generated 
B) additional funds 
C) natural operations 
D) temporary assets' 
E) extemporaneous short-term 
A) spontaneously generated 
B) additional funds 
C) natural operations 
D) temporary assets' 
E) extemporaneous short-term

Question 17

When constructing pro forma financial statements, which of the following equations can be used to estimate additional funds needed (AFN)?

Accepted Answer

A) Estimated AFN = Forecasted increase in assets + Forecasted increase in liabilities + Forecasted increase in retained earnings 
B) Estimated AFN = Forecasted increase in assets - Financing feedbacks + Forecasted increase in retained earnings 
C) Estimated AFN = Forecasted increase in assets - Financing feedbacks - Spontaneously generated funds 
D) Estimated AFN = Forecasted increase in liabilities + Financing feedbacks + Spontaneously generated funds 
E) Estimated AFN = Forecasted increase in assets - Forecasted increase in liabilities - Forecasted increase in retained earnings 
A) Estimated AFN = Forecasted increase in assets + Forecasted increase in liabilities + Forecasted increase in retained earnings 
B) Estimated AFN = Forecasted increase in assets - Financing feedbacks + Forecasted increase in retained earnings 
C) Estimated AFN = Forecasted increase in assets - Financing feedbacks - Spontaneously generated funds 
D) Estimated AFN = Forecasted increase in liabilities + Financing feedbacks + Spontaneously generated funds 
E) Estimated AFN = Forecasted increase in assets - Forecasted increase in liabilities - Forecasted increase in retained earnings

Question 18

Managements does not need to consider economies of scale in operations when constructing pro forma financial statements because economies of scale do not directly affect financial statements.

Accepted Answer

A) True 
 B)False

Question 19

Based on its existing sales, what is the formula for calculating the full-capacity sales of a firm?

Accepted Answer

A) Full-capacity sales = Existing sales level ÷ Percent of capacity used to generate existing sales level 
B) Full-capacity sales = Future sales level ÷ (1 - Percent of capacity used to generate existing sales level) 
C) Full-capacity sales = Future sales level ÷ Percent of capacity used to generate existing sales level 
D) Full-capacity sales = Future sales level ÷ (1 + Percent of capacity used to generate existing level of assets) 
E) Full-capacity sales = Existing sales level ÷ (1 - Percent of capacity used to generate existing level of assets) 
A) Full-capacity sales = Existing sales level ÷ Percent of capacity used to generate existing sales level 
B) Full-capacity sales = Future sales level ÷ (1 - Percent of capacity used to generate existing sales level) 
C) Full-capacity sales = Future sales level ÷ Percent of capacity used to generate existing sales level 
D) Full-capacity sales = Future sales level ÷ (1 + Percent of capacity used to generate existing level of assets) 
E) Full-capacity sales = Existing sales level ÷ (1 - Percent of capacity used to generate existing level of assets)

Question 20

Which of the following statements about operating breakeven analysis is correct?

Accepted Answer

A) Operating breakeven analysis involves determining the level of production and sales at which net operating income is equal to one. 
B) Operating breakeven analysis involves determining the point at which sales revenues equal operating costs. 
C) Operating breakeven analysis involves determining the level of production and sales at which financing costs are recovered. 
D) Operating breakeven analysis involves determining the operating income the firm needs to generate to cover all of its financing costs. 
E) Operating breakeven analysis involves the analysis of the interest payments to bondholders and the dividend payments to preferred stockholders. 
A) Operating breakeven analysis involves determining the level of production and sales at which net operating income is equal to one. 
B) Operating breakeven analysis involves determining the point at which sales revenues equal operating costs. 
C) Operating breakeven analysis involves determining the level of production and sales at which financing costs are recovered. 
D) Operating breakeven analysis involves determining the operating income the firm needs to generate to cover all of its financing costs. 
E) Operating breakeven analysis involves the analysis of the interest payments to bondholders and the dividend payments to preferred stockholders.

The percentage change in earnings before interest and taxes (EBIT) associated with a given percentage change in sales is known as the degree of _____ leverage.

Suppose a firm's degree of financial leverage (DFL) is 1.0. Which of the following statements concerning this firm is correct?

Which of the following is the first step involved in constructing pro forma financial statements?

Which of the following statements concerning the financial breakeven point, EBITFinBEP, is correct?

If a firm that has a degree of operating leverage (DOL) greater than 1.0 experiences a 1.0 percent change in _, its earnings before interest and taxes (EBIT) will change by _1.0 percent.

To compute the additional funds (AFN) the firm must raise using external financing sources to support a particular level of forecasted operations, the firm should _____.

Citation Manufacturing produces electronic components that sell for $600 each. The fixed production costs are $720,000 when 30,000 or fewer components are produced, and variable production costs are $510 per component. What is Citation's operating breakeven point?

Marcus Corporation currently sells 150,000 units per year at a price of $4.00 a unit. Its variable costs are 30 percent of sales, and its fixed operating costs are $300,000. What is Marcus's degree of operating leverage (DOL) at sales equal to 150,000 units?

Which of the following statements concerning the degree of total leverage (DTL) is correct?

If a firm that has fixed costs in its operations does not meet its forecasted sales level, its operating leverage will result in a magnified decrease in net income compared to what is expected.

Which of the following statements concerning lumpy assets is correct?

When economies of scale exist, a firm's _____ ratio is likely to decrease if the size of the firm increases substantially.

Deviations of actual sales from projected sales should be evaluated to determine how to improve future forecasts and the predictability of future operations, and therefore to ensure that the goals of the firm are being pursued appropriately.

When forecasting income statements, which of the following is generally a key assumption firms make about their variable operating costs?

Current liabilities accounts that change "naturally" with changes in sales provide funds that tend to change at the same rate as sales. These funds are referred to as ______ funds.

When constructing pro forma financial statements, which of the following equations can be used to estimate additional funds needed (AFN)?

Managements does not need to consider economies of scale in operations when constructing pro forma financial statements because economies of scale do not directly affect financial statements.

Based on its existing sales, what is the formula for calculating the full-capacity sales of a firm?

Which of the following statements about operating breakeven analysis is correct?

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debt Characteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Filters

Exam 16: Financial Planning and Control

The percentage change in earnings before interest and taxes (EBIT) associated with a given percentage change in sales is known as the degree of _____ leverage.

Suppose a firm's degree of financial leverage (DFL) is 1.0. Which of the following statements concerning this firm is correct?

Which of the following is the first step involved in constructing pro forma financial statements?

Which of the following statements concerning the financial breakeven point, EBITFinBEP, is correct?

If a firm that has a degree of operating leverage (DOL) greater than 1.0 experiences a 1.0 percent change in _____, its earnings before interest and taxes (EBIT) will change by _____1.0 percent.

To compute the additional funds (AFN) the firm must raise using external financing sources to support a particular level of forecasted operations, the firm should _____.

Citation Manufacturing produces electronic components that sell for $600 each. The fixed production costs are $720,000 when 30,000 or fewer components are produced, and variable production costs are $510 per component. What is Citation's operating breakeven point?

Marcus Corporation currently sells 150,000 units per year at a price of $4.00 a unit. Its variable costs are 30 percent of sales, and its fixed operating costs are $300,000. What is Marcus's degree of operating leverage (DOL) at sales equal to 150,000 units?

Which of the following statements concerning the degree of total leverage (DTL) is correct?

If a firm that has fixed costs in its operations does not meet its forecasted sales level, its operating leverage will result in a magnified decrease in net income compared to what is expected.

Which of the following statements concerning lumpy assets is correct?

When economies of scale exist, a firm's _____ ratio is likely to decrease if the size of the firm increases substantially.

Deviations of actual sales from projected sales should be evaluated to determine how to improve future forecasts and the predictability of future operations, and therefore to ensure that the goals of the firm are being pursued appropriately.

When forecasting income statements, which of the following is generally a key assumption firms make about their variable operating costs?

Current liabilities accounts that change "naturally" with changes in sales provide funds that tend to change at the same rate as sales. These funds are referred to as ______ funds.

When constructing pro forma financial statements, which of the following equations can be used to estimate additional funds needed (AFN)?

Managements does not need to consider economies of scale in operations when constructing pro forma financial statements because economies of scale do not directly affect financial statements.

Based on its existing sales, what is the formula for calculating the full-capacity sales of a firm?

Which of the following statements about operating breakeven analysis is correct?

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debt Characteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Filters

If a firm that has a degree of operating leverage (DOL) greater than 1.0 experiences a 1.0 percent change in _, its earnings before interest and taxes (EBIT) will change by _1.0 percent.