Degree of combined leverage can best be described as

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13-21. Degree of combined leverage can best be described as: a. DCL = % change in sales % change in net income b. DCL = % change in net income % change in EBIT c. DCL = % change in EBIT % change in net income d. DCL = % change in net income % change in sales 13-22. If sales = $1,000,000 fixed costs = 100,000 variable costs = 10,000 interest expense = 12,000 net income = 25,000 Calculate DCL. a. 0.89 b. 1.13 c. 1.14 d. 1.2 13-23. A leverage effect will occur if: a. fixed operating costs are greater than zero or if interest expense is less than zero b. fixed operating costs are greater than zero or if interest expense is greater than zero c. fixed operating costs are less than zero or if interest expense is greater than zero d. fixed operating costs are less than zero or if interest expense is less than zero 13-24. All else constant, a leveraged buyout will usually result in: a. a decrease in DFL b. a decrease in DCL c. an increase in DOL d. an increase in DFL 13-25. All else equal, new equity financing will: a. increase financial risk b. decrease DOL c. increase DCL d. decrease financial risk 158
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13-26. With respect to financial risk, Modigliani and Miller concluded that: a. if an interest payment is tax deductible, an all debt capital structure is optimal b. if an interest payment is not tax deductible, a no debt capital structure is optimal c. if an interest payment is tax deductible, debt and equity should be evenly divided d. an all-debt structure is theoretically not feasible 13-27. As a firm moves to a capital structure with higher debt: a. financial risk of the firm increases b. financial risk of the firm decreases if interest payments are tax deductible c. financial risk of the firm is unaffected if interest payments are tax deductible d. DOL increases 13-28. Capital structure can best be described as: a. long-term debt, preferred stock, common stock, and retained earnings b. common stock, retained earnings, current liabilities, and long-term debt c. everything on the income statement d. everything on the left-hand side of the balance sheet 13-29. If sales increases by 12% EBIT increases by 15% Net Income increases by 25% Interest expense increases by 10% Calculate DFL.
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