Principles of Managerial Finance, Brief Ed., 8e (Zutter/Smart)
Chapter 12 Leverage and Capital Structure
12.1 Leverage
1) Generally, increases in leverage result in increased return and risk.
Answer: TRUE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
2) Generally, decreases in leverage result in increased return and risk, whereas increases in
leverage result in decreased return and risk.
Answer: FALSE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
3) Total leverage can be defined as the potential use of fixed costs, both operating and financial,
to magnify the effect of changes in sales on a firm's earnings per share.
Answer: TRUE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
4) Leverage results from the use of equity to magnify returns to a firm's owners.
Answer: FALSE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
5) Operating leverage is concerned with the relationship between a firm's sales revenue and its
financial expenses.
Answer: FALSE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
1
Copyright © 2019 Pearson Education, Inc.
,6) Financial leverage is concerned with the relationship between a firm's earnings after interest
and taxes and its common stock earnings per share.
Answer: FALSE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
7) Total leverage is concerned with the relationship between a firm's sales revenue and its
common stock earnings per share.
Answer: TRUE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
8) A firm's capital structure is the mix of the current liabilities, long-term debt, and equity
maintained by the firm.
Answer: FALSE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
9) The levels of fixed-cost assets and funds that management selects affect the variability of
returns.
Answer: TRUE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
10) The amount of leverage in a firm's capital structure—the mix of long-term debt and equity
maintained by the firm—can significantly affect its value by affecting return and risk.
Answer: TRUE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
2
Copyright © 2019 Pearson Education, Inc.
,11) Both operating and financial leverage result in the magnification of return as well as risk.
Answer: TRUE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
12) While operating leverage results only in a magnification of returns, financial leverage results
only in a magnification of risk.
Answer: FALSE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
13) The dollar breakeven sales level can be solved for by dividing fixed costs by the contribution
margin ratio.
Answer: TRUE
Diff: 1
Topic: Breakeven Analysis
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
14) The dollar breakeven sales level can be solved for by dividing fixed costs by the dollar
contribution margin.
Answer: FALSE
Diff: 1
Topic: Breakeven Analysis
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
15) Breakeven analysis is used by a firm to determine the level of operations necessary to cover
all fixed operating costs and to evaluate the profitability associated with various levels of
production.
Answer: FALSE
Diff: 1
Topic: Breakeven Analysis
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
3
Copyright © 2019 Pearson Education, Inc.
, 16) A firm's operating breakeven point is the level of sales necessary to cover all fixed operating
costs.
Answer: FALSE
Diff: 1
Topic: Breakeven Analysis
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
17) In finding the operating breakeven point, it is important to divide the cost of goods sold and
operating expenses into fixed and variable operating costs.
Answer: TRUE
Diff: 1
Topic: Breakeven Analysis
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
18) At the operating breakeven point, the sales revenue is equal to the sum of the fixed and
variable operating costs.
Answer: TRUE
Diff: 1
Topic: Breakeven Analysis
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
19) Earnings before interest and taxes are positive above the operating breakeven point, and a
loss occurs below it.
Answer: TRUE
Diff: 1
Topic: Breakeven Analysis
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
20) For sales levels below the operating breakeven point, sales revenue exceeds total operating
costs, and earnings before interest and taxes is greater than zero.
Answer: FALSE
Diff: 1
Topic: Breakeven Analysis
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
4
Copyright © 2019 Pearson Education, Inc.
Chapter 12 Leverage and Capital Structure
12.1 Leverage
1) Generally, increases in leverage result in increased return and risk.
Answer: TRUE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
2) Generally, decreases in leverage result in increased return and risk, whereas increases in
leverage result in decreased return and risk.
Answer: FALSE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
3) Total leverage can be defined as the potential use of fixed costs, both operating and financial,
to magnify the effect of changes in sales on a firm's earnings per share.
Answer: TRUE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
4) Leverage results from the use of equity to magnify returns to a firm's owners.
Answer: FALSE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
5) Operating leverage is concerned with the relationship between a firm's sales revenue and its
financial expenses.
Answer: FALSE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
1
Copyright © 2019 Pearson Education, Inc.
,6) Financial leverage is concerned with the relationship between a firm's earnings after interest
and taxes and its common stock earnings per share.
Answer: FALSE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
7) Total leverage is concerned with the relationship between a firm's sales revenue and its
common stock earnings per share.
Answer: TRUE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
8) A firm's capital structure is the mix of the current liabilities, long-term debt, and equity
maintained by the firm.
Answer: FALSE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
9) The levels of fixed-cost assets and funds that management selects affect the variability of
returns.
Answer: TRUE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
10) The amount of leverage in a firm's capital structure—the mix of long-term debt and equity
maintained by the firm—can significantly affect its value by affecting return and risk.
Answer: TRUE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
2
Copyright © 2019 Pearson Education, Inc.
,11) Both operating and financial leverage result in the magnification of return as well as risk.
Answer: TRUE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
12) While operating leverage results only in a magnification of returns, financial leverage results
only in a magnification of risk.
Answer: FALSE
Diff: 1
Topic: Leverage
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
13) The dollar breakeven sales level can be solved for by dividing fixed costs by the contribution
margin ratio.
Answer: TRUE
Diff: 1
Topic: Breakeven Analysis
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
14) The dollar breakeven sales level can be solved for by dividing fixed costs by the dollar
contribution margin.
Answer: FALSE
Diff: 1
Topic: Breakeven Analysis
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
15) Breakeven analysis is used by a firm to determine the level of operations necessary to cover
all fixed operating costs and to evaluate the profitability associated with various levels of
production.
Answer: FALSE
Diff: 1
Topic: Breakeven Analysis
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
3
Copyright © 2019 Pearson Education, Inc.
, 16) A firm's operating breakeven point is the level of sales necessary to cover all fixed operating
costs.
Answer: FALSE
Diff: 1
Topic: Breakeven Analysis
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
17) In finding the operating breakeven point, it is important to divide the cost of goods sold and
operating expenses into fixed and variable operating costs.
Answer: TRUE
Diff: 1
Topic: Breakeven Analysis
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
18) At the operating breakeven point, the sales revenue is equal to the sum of the fixed and
variable operating costs.
Answer: TRUE
Diff: 1
Topic: Breakeven Analysis
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
19) Earnings before interest and taxes are positive above the operating breakeven point, and a
loss occurs below it.
Answer: TRUE
Diff: 1
Topic: Breakeven Analysis
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
20) For sales levels below the operating breakeven point, sales revenue exceeds total operating
costs, and earnings before interest and taxes is greater than zero.
Answer: FALSE
Diff: 1
Topic: Breakeven Analysis
Learning Obj.: LG 1
Learning Outcome: F-21
AACSB: Analytical Thinking
4
Copyright © 2019 Pearson Education, Inc.
