FIN 3403 Final Exam Conceptual Questions And Answers.docx

FIN 3403 Final Exam Conceptual Questions
And Answers
Operating Leverage -
correct answer ✅Increases Operating Income
Increases business risk


Business Risk -
correct answer ✅The volatility of EBIT


Financial Leverage -
correct answer ✅Increases EPS
Increases financial risk


Financial Risk -
correct answer ✅Risk driven by the presence of fixed finance costs
in the firm's capital structure (as opposed to variable finance costs
such as dividends declared and paid)


You can increase Operating Leverage by... -
correct answer ✅Increasing fixed operating costs (rent, salaries,
etc.)

, FIN 3403 Final Exam Conceptual Questions
And Answers
You can increase Financial Leverage by... -
correct answer ✅Increasing fixed financing costs (debt and
preferred stock)


Examples of fixed costs: -
correct answer ✅Rent, salaries, insurance, property tax


Examples of variable costs: -
correct answer ✅Materials, labor, energy, packaging, sales
commissions


With high Operating Leverage, an increase in sales produces a
relatively larger increase in... -
correct answer ✅Operating Income


With high Financial Leverage, an increase in operating income
produces a relatively larger increase in... -
correct answer ✅Earnings per share


With high Combined Leverage, an increase in sales produces a
relatively larger increase in... -
correct answer ✅Earnings per share