Leverages – Financial and Strategic Management MCQBy CACSMockTest / November 25, 2022 1 Leverages – Financial and Strategic Management MCQ 1 / 50 Calculate the degree of financial leverage (DFL) for a firm when its EBIT is ₹ 20,00,000. The firm has ₹ 30,00,000 in debt that costs 10% annually. The firm also has a 9%, ₹ 10,00,000preferred stock issue outstanding. The firm pays 40% in taxes. (A) 0.78 (B) 0.80 (C) 1.24 (D) 1.29 2 / 50 A firm has a DFL of 3.5. What does this tell us about the firm? (A) If sales rise by 3.5%, then EBIT will rise by 1%. (B) If EBIT rises by 3.5%, then EPS will rise by 1%. (C) If EBIT rises by 1 %, then EPS will rise by 3.5%. (D) If sales rise by 1 % at the firm, then EBIT will rise by 3.5%. 3 / 50 He has a DOL of 3.5 at Q units. What does this tell us about the firm? (A) If sales rise by 3.5% at the firm, then EBIT will rise by 1%. (B) If EBIT rises by 3.5% at the firm, then EPS will rise by 1%. (C) If EBIT rises by 1% at the firm, then EPS will rise by 3.5%. (D) If sales rise by 1 % at the firm, then EBIT will rise by 3.5% 4 / 50 Operating leverage 2.5; financial leverage 3; EPS ₹ 30; the market price per share ₹ 225; and capital 20,000 shares. It is proposed to raise a loan of ₹ 50,00,000 @18% for expansion. After expansion, sales will increase by 25% and fixed cost by ₹ 3,00,000.Work out the market price per share after expansion, assuming tax rate @ 50%. (A) 25.56 (B) 52.56 (C) 56.25 (D) 65.52 5 / 50 ABC Ltd. has an average selling price of ₹ 10 per unit. Its variable unit costs are ₹ 7 and fixed costs amount to ₹ 1,70,000. It finances all its assets with equity funds. It pays 30% tax on its income. QPR Ltd. is identical to ABC Ltd. except in respect of the pattern of financing. The latter finances its assets 50% by equity and 50% by debt, the interest on which amounts to ₹ 20,000. (A) Both companies have similar business risks. (B) QPR Ltd. has high financial risk as compared to ABC Ltd. (C) QPR Ltd. has high business risk & financial risk as compared to ABC Ltd. (D) All of the above 6 / 50 Which of the following company has greater business risk? (A) A Ltd. (B) B Ltd. (C) C Ltd. (D) D Ltd. 7 / 50 Total assets of Q Ltd. are ₹ 6,00,000. The total assets turnover ratio is 2.5 times. The fixed operating costs are ₹ 2,00,000 and the variable operating cost ratio is 40%. The income tax rate is 30%. No. of equity shares are 18,000. Determine the likely level of EBIT if EPS is ₹ 6. (A) ₹ 1,54,286 (B) ₹ 1,78,286 (C) ₹ 1,54,682 (D) ₹ 1,78,862 8 / 50 The total assets of Honey Well Ltd. are ₹ 6,00,000. The total assets turnover ratio is 2.5 times. The fixed operating costs are ₹ 2,00,000 and the variable operating cost ratio is 40%. The income tax rate is 30%. Calculate operating, financial, and combined leverage? (A) 1.2857; 1.0355; 1.3314 (B) 1.0355; 1.2857; 1.3314 (C) 1.3314; 1.0355; 1.2857 (D) 1.2857; 1.3314; 1.2857 9 / 50 What percentage will taxable income increase, if the sales increase by 6% (A) 22.29% (B) 22.92% (C) 22.78% (D) 22.87% 10 / 50 What percentage will EBIT increase, if there is a 10% increase in sales? (A) 32.0% (B) 31.14% (C) 33.71% (D) 32.5% 11 / 50 The following data is available for Y Ltd. Variable cost (% of sales) 75% Interest expense ₹ 30,000 DOL 6:1 DFL 4:1 Corporate tax rate 30%Contribution = ? (A) ₹ 9,60,000 (B) ₹ 2,40,000 (C) ₹ 3,00,000 (D) ₹ 7,80,000 12 / 50 The following data is available for Alpha Ltd. Financial leverage 2:1 Operating leverage 3:1 Interest charges ₹ 20 lakh Corporate tax rate 40% Variable (% of sales) 60%Sales =? (A) ₹ 1,00,00,000 (B) ₹ 1,20,00,000 (C) ₹ 2,00,00,000 (D) ₹ 3,00,00,000 13 / 50 From the following data of Abhishek Ltd., compute the operating leverage, financial leverage, combined leverage. ₹ EBIT 10 Lakh Profit before tax (PBT) 4 lakh Fixed cost 6 lakh (A) 1.6;2.5,4.0 (B) 2.5; 1.6; 4.0 (C) 4.0; 2.5; 1.6 (D) 4.0; 1.5; 2.5 14 / 50 ThFixed Cost: e contribution of a firm is ₹ 4,000.Situation A ₹ 1,000 Situation B ₹ 2,000 Situation C ₹ 3,000 Compute the operating leverage for the three situations. (A) 1.33; 1.18; 1.82 (B) 1.33; 2.36; 2.86 (C) 2.86; 2.00; 3.64 (D) 1.33; 2.00; 4.00 15 / 50 Variable cost = ₹ 2,40,000 ESales = ₹ 4,00,000 BOperating leverage = ? IT = ₹ 40,000 (A) 3.5 (B) 4.125 (C) 4.6 (D) 3.125 16 / 50 Combined leverage = 3.5 Operating leverage = 2EBIT = ₹ 2,80,000 Interest = ₹ 40,000 Tax rate = 50%. The capital structure of the company consists of equity shares and preference shares. Amount of Preference Dividend =? (A) ₹ 39,967 (B) ₹ 39,970 (C) ₹ 39,000 (D) ₹ 40,000 17 / 50 Total assets of Alpha Company sire ₹ 3,00,000. The company’s total assets turnover ratio is 3, its fixed operating cost is ₹ 1,50,000 and its variable operating cost ratio is 50%. The income-tax rate is 50%. It also has long-term debts of ₹ 1,20,000 on which interest @ 10% is payable. Operating, Financial & Combined Leverages of the company is (A) 1.5; 1.042; 1.563 respectively (B) 1.05; 1.42; 1.05625 respectively (C) 1.50; 1.42; 2.13 respectively (D) 1.55; 1.042; 1.6151 respectively 18 / 50 Operating leverage is 7 and financial leverage is 2.2858. How much change in sales will be required to bring 7096 change in EBIT? (A) 10% (B) 70% (C) 11.429% (D) 30% 19 / 50 If stiles increase by 6% taxable income Le. PAT and EPS will increase by 24%.Combined leverage must be (A) 3 (B) 4 (C) 5 (D) 6 20 / 50 If there is a 10% increase in sales, EBIT increases by 35% and if sales increase by 6%, taxable income will increase by 24%. Operating leverage must be (A) 1.15 (B) 3.50 (C) 4.00 (D) 2.67 21 / 50 Financial leverage is 2.5. This means a 10% change in EBIT will cause (A) 2.5% change in EBIT (B) 2.5% change in EPS (C) 25% change in sales (D) 25% change in EBT and EPS 22 / 50 A company has sales of ₹ 1 lakh. The variable costs are 40% of the sales while the fixed operating costs amount to ₹ 30,000. The amount of interest on long-term debts is ₹ 10,000. You are required to calculate the combined leverage. (A) 4 (B) 2 (C) 3 (D) 5 23 / 50 If combined leverage is 2 and financial leverage is 1.25 then operating leverage will be (A) 0.625 (B) 2.50 (C) 1.60 (D) Data given is not sufficient 24 / 50 Output (units) = 3,00,000Fixed cost = ₹ 3,50,000 Unit variable cost = ₹ 1.00 Interest expenses = ₹ 25,000 Unit selling price = ₹ 3.00 Applicable tax rate is 35% Calculate Combined Leverage. (A) 2,67 (B) 2.30 (C) 2.00 (D) 2.15 25 / 50 Output (units) = 3,00,000 Fixed cost = ₹ 3,50,000 Unit variable cost = ₹ LOO Interest expenses = ₹ 25,000 Unit selling price = ₹ 3.00 Applicable tax rate is 35% Calculate Operating Leverage. (A) 1.11 (B) 2.40 (C) 2.67 (D) 1.07 26 / 50 Operating leverage may be defined as: (A) The degree to which debt is used in financing the firm (B) The difference between price and variable costs (C) The extent to which capital assets and fixed costs are utilized (D) The difference between fixed costs and the contribution margin 27 / 50 Assertion (A):High operating leverage shows a higher burden of fixed cost. Reason (R):As fixed cost goes on increasing EBIT reduces. (A) (A) is correct but (R) is incorrect. (B) (A) is incorrect but (R) is correct (C) Both (A) and (R) are not correct (D) (A) is correct and (R) is the correct explanation of (A) 28 / 50 Read the following statement.(i) With the increase in fixed cost operating leverage diminishes. (ii) Networking Capital is the excess of current assets over current liabilities. (iii) Greater the size of the business unit larger will be the requirement of working capital. (iv) Working Capital is also known as circulating capital. Which of the above statement is correct? (A) (i), (ii) and (iii) (B) (ii), (iii) and (iv) (C) (iii), (iv) and (i) (D) (i), (ii) and (iv) 29 / 50 Which one of the following is correct?(i) Liquidity ratios measure’s long-term solvency of a concern. (ii) Inventory is a part of liquidity assets. (iii) Financial leverage is related to business risk. (iv) The number of gross assets is equal to net capital employed. Select the correct answer from the options given below: (A) (i), (ii) and (iv) (B) (ii), (iii) and (iv) (C) (i), (ii), (iii) and (iv) (D) None of the above 30 / 50 Earnings to equity shareholders (EPS) will fluctuate violently if (A) Financial leverage is very high (B) Operating leverage is very high (C) Working capital leverage is very high (D) Operating leverage is very low 31 / 50 High financial leverage is not good as it indicates the large content of (A) Fixed cost (B) Fixed interest charges (C) Variable cost charges (D) Contribution 32 / 50 Which of the following formulas represents the correct calculation of the degree of financial leverage? (A) [NI + T + I]/[NI1 PD/(1 T)] (B) EBIT/[EBIT1 PD/(1 T)] (C) EBIT/[NI1 PD/(1 T)] (D) All of the above are correct methods to calculate the degree of financial leverage (DFL). 33 / 50 Which of the following formulas represents a correct calculation of the degree of operating leverage? (A) (Q – QBE)/Q (B) (EBIT)/(EBIT FC) (C) [Q(P V) + FC]/[Q(P V)] (D) [Q(P V)]/[Q(P V) FC] 34 / 50 If financial leverage is 2.5, this means that (A) 2.5% change in EBIT will cause a 1% change in EBIT (B) 1% change in sales will cause a 2.5% change in EBIT (C) 2.5% change in sales will cause a 1% change in EBIT (D) 1% change in EBIT will cause a 2.5% change in EBIT 35 / 50 The operating leverage indicates the impact of changes in sales on (A) Operating income (B) Operating cost (C) Operating profit after tax (D) Operating sales 36 / 50 Lower financial leverage is related to the use of additional (A) Fixed costs (B) Variable costs (C) Debt financing (D) Common equity financing 37 / 50 Higher operating leverage is related to the use of additional (A) Fixed costs (B) Variable costs (C) Debt financing (D) Common equity financing 38 / 50 More operating leverage leads to (A) Less financial risk (B) More financial risk (C) More business risk (D) Less business risk 39 / 50 Operating leverage is directly__ to business risk. (A) Proportional (B) Not proportional (C) Unrelated (D) Not related 40 / 50 A firm has a DOL of 4.5 at Q units.What does this tell us about the firm? (A) If sales rise by 4.5%, then EBIT will rise by 1%. (B) If EBIT rises by 4.5%, then EPS will rise by 1%. (C) If EBIT rises by 1 %, then EPS will rise by 4.5%. (D) If sales rise by 1 %, then EBIT will rise by 4.5% 41 / 50 Operating leverage depends onI. ContributionII. Interest costIII. Fixed costIV. Volume of salesV. EPSVI. Profit after tax (PAT)Select the correct answer from the options given below: (A) I, IV, III (B) II, V, VI (C) I, III, V (D) VI, I, III 42 / 50 High operating leverage indicates (A) Highly favorable situation as it consists of low fixed costs. (B) The Highly risky situation as it consists of large interest costs. (C) Highly favorable situation as it consists of higher EPS. (D) The Highly risky situation as it consists of large fixed costs. 43 / 50 The measure of business risk is (A) Operating leverage (B) Financial leverage (C) Combines leverage (D) Working capital leverage 44 / 50 The degree of total leverage can be applied in measuring the change in (A) EBIT to a percentage change in sales (B) EPS to a percentage change in ‘ EBIT (C) EPS to a percentage change in sales (D) Sales to a percentage change in EBIT 45 / 50 A firm’s degree of total leverage (DTL) is equal to its degree of operating leverage its degree of financial leverage (DFL). (A) Plus (B) Minus (C) Divided by (D) Multiplied by 46 / 50 In the context of operating leverage break-even analysis, if the selling price per unit rises and all other variables remain constant, the operating break-even point in units will: (A) Fall (B) Rise (C) Stay the same (D) Still be indeterminate until inter-est and preferred dividends paid are known 47 / 50 There is no operating leverage if there is no (A) Profit (B) Sales (C) Fixed cost (D) EPS 48 / 50 Operating leverage indicates the tendency of operating profits (EBIT) > to vary disproportionately with zj (A) Probst (B) Fixed cost (C) Sales (D) EPS 49 / 50 Which of the following are not commonly used measures of leverage in financial analysis? (A) Operating Leverage (B) Financial Leverage (C) Combined Leverage (D) Matrix Leverage 50 / 50 The term Leverage in general refers to a (A) Relationship between fixed cost and profit. (B) Relationship between sales and fixed cost. (C) Relationship between two inter-related variables. (D) Relationship between two unrelated variables. Your score is LinkedIn Facebook Twitter VKontakte Related