1. Choose the true statement.
a. The degree of operating leverage is concerned with changes in EBIT and changes in net income.
b. The degree of financial leverage is concerned with changes in volume and changes in EBIT.
c. The degree of combined leverage is concerned with changes in EBIT and changes in EPS.
d. The degree of combined leverage is concerned with changes in volume and changes in EPS.
2. In comparing two potential financing plans, one that employs a larger amount of debt (more highly leveraged) and one that employs a smaller amount of debt (conservative), which of the following is false?
a. When the return on assets equals the cost of debt, the two plans produce the same EPS.
b. For both plans, EPS rises as EBIT rises.
c. The more leveraged plan will produce a higher EPS at lower EBIT levels.
d. The more leveraged plan will produce higher EPS at higher EBIT levels.
e. The conservative plan will produce higher EPS at lower EBIT levels.