A Firm Has a Degree of Financial Leverage of 1

question 19

Multiple Choice

A firm has a degree of financial leverage of 1.20.If earnings before interest and tax increase by 20%, then net income:

• A) will not necessarily change
• B) will increase by 20%
• C) will decrease by 24%
• D) will decrease by 20%
• E) none of the answers are correct

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Definitions:

Supply Curve

Is a graphical representation showing the relationship between the price of a good or service and the quantity supplied.

Loanable Funds

The money available for borrowing, influenced by savings and investments, in financial markets.

Interest Rates

The cost of borrowing money, typically expressed as a percentage of the amount borrowed, paid to the lender over a specified period.

Loanable Funds

Refers to the money available for borrowing. The market for loanable funds is where borrowers demand and lenders supply funds, determining the interest rate.