Multiple Choice Questions

1. Operating leverage helps in analysis of:

(a) Business Risk,(b) Financing Risk,(c) Production Risk,(d) Credit Risk

2. Which of the following is studied with the help of financial leverage?

(a) Marketing Risk,(b) Interest Rate Risk,(c) Foreign Exchange Risk,(d) Financing risk

3. Combined Leverage is obtained from OL and FL by their:

(a) Addition,(b) Subtraction,(c) Multiplication,(d) Any of these

4. High degree of financial leverage means:

(a) High debt proportion,(b) Lower debt proportion,(c) Equal debt and equity,(d) No debt

5. Operating leverage arises because of:

(a) Fixed Cost of Production,(b) Fixed Interest Cost,(c) Variable Cost,(d) None of the above

6. Financial Leverage arises because of:

(a) Fixed cost of production,(b) Variable Cost,(c) Interest Cost,(d) None of the above

7. Operating Leverage is calculated as:

(a) Contribution EBIT,(b) EBITPBT,(c) EBIT Interest,(d) EBIT Tax

8. Financial Leverage is calculated as:

(a) EBIT Contribution, (b) EBIT PBT,(c) EBIT Sales, (d) EBIT Variable Cost

9. Which combination is generally good for firms

(a) High OL, High FL (b) Low OL, Low FL, (c) High OL, Low FL,(d) None of these

10. Combined leverage can be used to measure the relationship between:

(a) EBIT and EPS,(b) PAT and EPS,(c) Sales and EPS,(d) Sales and EBIT

11. FL is zero if:

(a) EBIT = Interest,(b) EBIT = Zero,(c) EBIT = Fixed Cost,(d) EBIT = Pref. Dividend

12. Business risk can be measured by:

(a) Financial leverage,(b) Operating leverage,(c) Combined leverage,(d) None of the above

13. Financial Leverage measures relationship between

(a) EBIT and PBT,(b) EBIT and EPS,(c) Sales and PBT,(d) Sales and EPS

14. Use of Preference Share Capital in Capital structure

(a) Increases OL,(b) Increases FL,(c) Decreases OL,(d) Decreases FL

15. Relationship between change in sales and change m is measured by:

(a) Financial leverage,(b) Combined leverage(c) Operating leverage,(d) None of the above16. Operating leverage works when:(a) Sales Increases, (b) Sales Decreases, (c) Both (a) and (b), (d) None of (a) and (b)17. Which of the following is correct? (a) CL= OL + FL,(b) -FL,(c) OL= OL FL,(d) FL18. If the fixed cost of production is zero, which one of the following is correct?(a) OL is zero, (b) FL is zero, (c) CL is zero, (d) None of the above19. If a firm has no debt, which one is correct?(a) OL is one, (b) FL is one, (c) OL is zero, (d)FL is zero20. If a company issues new share capital to redeem debentures, then:(a) OL will increase,(b) FL will increase,(c) OL will decrease,(d) FL will decrease21. If a firm has a DOL of 2.8, it means:(a) If sales increase by 2.8%, the EBIT will increase by 1%,(b) If EBIT increase by 2.896, the EPS will increase by 1 %, (c) If sales rise by 1%, EBIT will rise by 2.8%, (d) None of the above22. Higher OL is related to the use of higher:(a) Debt,(b) Equity,(c) Fixed Cost,(d) Variable Cost23. Higher FL is related the use of:(a) Higher Equity,(b) Higher Debt,(c) Lower Debt,(d) None of the above