Question1: Which of the following statements about combined (operating & financial) leverage is true?
[A] Usage of both operating and financial leverage reduces a firm's risk.
[B] High operating leverage and high financial leverage offset one another, meaning that if sales increase by 10%, then EPS will also increase by 10%.
[C] If a firm employs both operating and financial leverage, any percent change in sales will produce a larger percent change in earnings per share.
[D] A firm that is in a capital-intensive industry should use a higher level of financial leverage than a firm that employs low levels of operating leverage.
Question2: Financing a portion of a firm's assets with securities bearing a fixed rate of return in hopes of increasing the return to stockholders refers to ___.
[A] Operating leverage
[B] Combined leverage
[C] Business risk
[D] Financial leverage
Question3: A corporation with very high growth prospects and many positive NPV projects to fund may want to increase its dividend based on ______.
[A] The information effect
[B] The very low agency costs of the corporation
[C] The tax bias against capital gains
[D] The residual dividend theory
Question4: Which of these is true?
[A] Financial leverage is the responsiveness of the firm's EPS to fluctuations in EBIT.
[B] Financial leverage reduces a firm's risk.
[C] Financial leverage is the responsiveness of the firm's EBIT to fluctuations in sales.
[D] Financial leverage involves the incurrence of fixed operating costs in the firm's income stream.