Which of the Following Is True of the Degree of Financial

question 31

Multiple Choice

Which of the following is true of the degree of financial leverage of a firm?

• A) The degree of financial leverage affects the earnings before interest and taxes of the firm.
• B) The degree of financial leverage is defined as the percentage change in net operating income with a given percentage change in sales.
• C) A lower degree of financial leverage suggests that higher risk is associated with the firm's normal operating activities.
• D) The degree of financial leverage affects the operating section of the income statement.
• E) A higher degree of financial leverage suggests that higher risk is associated with the firm's mix of debt and equity financing.

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Definitions:

Representativeness Heuristic

A cognitive shortcut used in decision making, where an individual relies on the similarity between the item in question and a category prototype.

Divergent Thinking

Expanding the number of possible problem solutions; creative thinking that diverges in different directions.

Fixation

(1) in thinking, the inability to see a problem from a new perspective; an obstacle to problemsolving. (2) in personality theory, according to Freud, a lingering focus of pleasure-seeking the developing human organism from about 2 weeks after fertilization through the secondmonth

Divergent Thinking

A thought process or method used to generate creative ideas by exploring many possible solutions.