correct? A. Firms that use large amounts of operating leverage will find that their EBIT will be more variable than firms that do not. B. If a 20% change in sales results in a 10% change in EBIT, we would say that the degree of operating leverage (DOL) is 2. C. The use of higher debt financing concentrates the firm’s business risk onto more shareholders, making the stock less risky. D. All the answers are correct. E. If a firm’s operating costs
1 a) Which of the following statements is correct?
A. Firms that use large amounts of operating leverage will find that their EBIT will be more variable than firms that do not.
B. If a 20% change in sales results in a 10% change in EBIT, we would say that the degree of operating leverage (DOL) is 2.
C. The use of higher debt financing concentrates the firm’s business risk onto more shareholders, making the stock less risky.
D. All the answers are correct.
E. If a firm’s operating costs are all variable, then any variation in sales will be less than the variation in EBIT.
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1 b)Which of the following statements is incorrect?
A. We would say that a firm with the high variability of EBIT has high levels of business risk.
B. If a firm is selling widgets for $30 per unit, while variable costs are $20 per unit and fixed costs total $100,000, then the firm must sell 10,000 units to be at operating break even.
C. We can measure financial leverage by comparing the percentage change in EBIT to a given percentage change in fixed assets.
D. Managers need to be aware that they face both business risk and financial risk, and that both affect the stock’s beta.
E. All the answers are correct except one.
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