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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