FIN 305 Finals Prep-Questions with 100% Correct
Solutions
combined leverage
The phenomenon whereby a change in sales causes net income to change by a larger percentage
because of fixed operating and financial costs.
degree of combined leverage (DCL)
The percentage change in net income divided by the percentage change in sales.
degree of financial leverage (DFL)
The percentage change in net income divided by the percentage change in operating income
degree of operating leverage (DOL)
The percentage change in operating income divided by the percentage change in sales.
financial leverage
The phenomenon whereby a change in operating income causes net income to change by a larger
percentage because of the presence of fixed financial costs.
fixed costs
Costs that do not vary with the level of production.
leverage
Something that creates a magnifying effect, such as when fixed operating or fixed financial costs
cause a magnifying effect on the movements of operating income or net income.
, operating leverage
The effect of fixed operating costs on operating income; because of fixed costs, any change in
sales results in a larger percentage change in operating income
Sales breakeven point
The level of sales that must be achieved such that operating income equals zero
variable costs
Costs that vary with the level of production.
Capital Structure
the mixture of funding sources (debt, preferred stock, or common stock) that a firm uses to
finance its assets
Business Risk
triggered by sales volatility and magnified by fixed operating costs
High fixed costs
low variable costs
High variable costs
low fixed costs
Sales above break even point indicate
profit
Leveraged buyout (LBO)
Solutions
combined leverage
The phenomenon whereby a change in sales causes net income to change by a larger percentage
because of fixed operating and financial costs.
degree of combined leverage (DCL)
The percentage change in net income divided by the percentage change in sales.
degree of financial leverage (DFL)
The percentage change in net income divided by the percentage change in operating income
degree of operating leverage (DOL)
The percentage change in operating income divided by the percentage change in sales.
financial leverage
The phenomenon whereby a change in operating income causes net income to change by a larger
percentage because of the presence of fixed financial costs.
fixed costs
Costs that do not vary with the level of production.
leverage
Something that creates a magnifying effect, such as when fixed operating or fixed financial costs
cause a magnifying effect on the movements of operating income or net income.
, operating leverage
The effect of fixed operating costs on operating income; because of fixed costs, any change in
sales results in a larger percentage change in operating income
Sales breakeven point
The level of sales that must be achieved such that operating income equals zero
variable costs
Costs that vary with the level of production.
Capital Structure
the mixture of funding sources (debt, preferred stock, or common stock) that a firm uses to
finance its assets
Business Risk
triggered by sales volatility and magnified by fixed operating costs
High fixed costs
low variable costs
High variable costs
low fixed costs
Sales above break even point indicate
profit
Leveraged buyout (LBO)
