1. Financial leverage has the following effect on financial performance:

A. leverage always makes performance better and thereby increases stock price.

B. during periods of reasonably good performance, leverage enhances results in terms of ROE and EPS.

C. leverage adds variability to financial performance making the firm's stock a riskier investment.

D. Both "during periods of reasonably good performance, leverage enhances results in terms of ROE and EPS" and "leverage adds variability to financial performance making the firm's stock a riskier investment".

2. Which of the following is correct?

A. In a leveraged firm, the variation in ROE and EPS is always greater than the variation in EBIT.

B. Financial risk is the additional variation in ROE and EPS arising from the use of debt.

C. The variation in ROE and EPS for an unleveraged firm is identical to variation in EBIT.

D. All of these choices are correct.

3. The use of fixed cost sources of funds, such as debt and preferred stock, affect a firm's:

A. market power.

B. degree of operating leverage.

C. financial risk.

D. business risk.

4. The increased variability in earnings per share due to the use of debt is:

A. aoperating risk.

B. combined leverage.

C. financial risk.

D. business risk.

5.If a firm's EBIT changes by 20% and it has a degree of financial leverage (DFL) of 2.0, what is the expected change in earnings per share (EPS)?

A. 20%

B. 40%

C. 60%

D. 50%

6. Operating leverage involves the use of:

A. equity and debt in equal proportions.

B. debt.

C. market power.

D. fixed costs.