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Objective Question Bank For Leverage

The document contains an objective question bank on leverage with 16 multiple-choice questions. The questions cover topics such as operating leverage, financial leverage, combined leverage, the calculation of different types of leverage, and how leverage can be used to analyze the relationship between various financial metrics such as EBIT, EPS, sales, etc. The questions also test understanding of concepts like the effects of different capital structure choices on leverage, and how leverage can be used to measure business risk.

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adhishca
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3K views2 pages

Objective Question Bank For Leverage

The document contains an objective question bank on leverage with 16 multiple-choice questions. The questions cover topics such as operating leverage, financial leverage, combined leverage, the calculation of different types of leverage, and how leverage can be used to analyze the relationship between various financial metrics such as EBIT, EPS, sales, etc. The questions also test understanding of concepts like the effects of different capital structure choices on leverage, and how leverage can be used to measure business risk.

Uploaded by

adhishca
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

OBJECTIVE QUESTION BANK FOR LEVERAGE

Question: 1
State whether each of the following statements is True (T) or False (F)
(i) Operating leverage analyses the relationship between sales level and EPS
(ii) Financial leverage depends upon the operating leverage.
(iii) Dividend on preference share is a factor of operating leverage.
(iv) Operating leverage may be defined as contribution / EPS.
(v) Financial leverage depends upon the fixed financial charges.
(vi) Combined leverage establishes the relationship between operating leverage and financial leverage.
(vii) Total risk of a firm is determined by the combined effect of operating and financial leverage.
(viii) Combined leverage helps in analysing the effect of change in sales level on the EPS of the firm.

Question: 2
Operating leverage helps in analysis of:
(a) Business risk (b) Financial risk (c) Production risk (d) Credit risk

Question: 3
Which of the following is studied with the help of financial leverage?
(a) Marketing risk (b) Interest rate risk (c) Foreign exchange risk (d) Financial risk

Question: 4
Combined Leverage is obtained from OL and FL by their:
(a) Addition (b) Subtractions (c) Multiplication (d) Any of these

Question: 5
High degree of financial leverage means:
(a) High debt proportion (b) Lower debt proportion
(c) Equal debt and equity (d) No debt

Question: 6
Operating leverage arises because of:
(a) Fixed cost of production (b) Fixed interest cost
(c) Variable cost (d) None of the above

Question: 7
Financial Leverage arises because of:
(a) Fixed cost of production (b) Variable cost
(c) Interest cost (d) None of the above

Question: 8
Operating Leverage is calculated as:
Contribution EBIT
(a) EBIT (b) PBT
EBIT EBIT
(c) Interest (d) Tax

Question: 9
Financial Leverage is calculated as:
EBIT EBIT
(a) Contribution (b) PBT
EBIT EBIT
(c) Sales (d) Variable cost
Question: 10
Combined leverage can be used to measure the relationship between:
(a) EBIT and EPS (b) PAT and EPS
(c) Sales and EPS (d) Sales and EBIT

Question: 11
FL is zero if:
(a) EBIT – Interest (b) EBIT = ZERO
(c) EBIT = Fixed cost (d) EBIT = Preference dividend

Question: 12
Business risk can be measured by:
(a) Financial leverage (b) Operating leverage (c) Combined leverage (d) None

Question: 13
Financial Leverage measures relationship between:
(a) EBIT and PBT (b) EBIT and EPS (c) Sales and PBT (d) Sales and EPS

Question: 14
Use of Preference Share Capital in Capital structure:
(a) Increases OL (b) Increases FL (c) Deceases OL (d) Decreases FL

Question: 15 Fill in the Blanks.


(i) Financial leverage occurs when firm has …………….in its capital structure.
(ii) Operating leverage is an index of ……………..risk.
(iii) DCL (Degree of Combined Leverage) = DOL (Degree of Operating Leverage) × …………………
(iv) Total risk of the firm consists of ……………………….risk and Financial risk.
(v) Operating Leverage 1.5 denotes that percentage change in EBIT is …………………the percentage
changes in Sales.

Answers: (i) Debt; (ii) Business; (iii) DFL; (iv) Business; (v) 1.5 times more than

Question: 16
The following information are given for a company:
EBIT `10,00,000
EBT `3,20,000
Fixed costs `5,00,000
Calculate the % change in EPS if the sales are expected to increase by 5%.
(a) 12.5 % (b) 24.68 % (c) 23.43 % (d) None

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