Company D Has a 50% Debt Ratio, Whereas Company E

question 12

Multiple Choice

Company D has a 50% debt ratio, whereas Company E has no debt financing. The two companies have the same level of sales and the same degree of operating leverage. Which of the following statements is most CORRECT?

• A) If sales increase 10% for both companies, then Company D will have a larger percentage increase in its operating income (EBIT).
• B) The two companies have the same degree of total leverage.
• C) If sales increase 10% for both companies, then Company D will have a larger percentage increase in its net income.
• D) If EBIT increases 10% for both companies, then Company D's net income will rise by more than 10%, while Company E's net income will rise by less than 10%.
• E) Company E has a higher degree of financial leverage.

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Definitions:

Budgeted Costs

Estimated financial plan for expenditures over a specified period.

Direct Labor Hours

This term represents the total time spent by workers directly involved in the manufacturing process.

Flexible Budget Graph

A visual representation that shows the difference between actual and expected performance at various levels of activity.

Direct Labor Hours

The cumulative hours that employees, who are engaged directly in creating products or delivering services, spend on work.