Expert Analysts Resources (EAR) Has Provided You with the Following

question 36

Multiple Choice

Expert Analysts Resources (EAR) has provided you with the following information about three companies you are currently evaluating:
Company Degree of Operating Leverage (DOL) Degree of Financial Leverage (DFL)
Acme 1.5× 6.0×
Apex 3.0× 4.0×
Alps 5.0× 2.0×
_____ would be considered riskiest because _____.

• A) Acme; its DFL equals 6.0, which is the highest leverage associated with any of the three firms
• B) Acme; its degree of total leverage (DTL) is almost equal to 10×
• C) Apex; it has the highest degree of total leverage (DTL) among the three firms
• D) Alps; it has the highest DOL among the three firms
• E) Acme; it has the lowest DOL among the three firms

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Definitions:

Ordinary Annuity

A series of equal payments made at the end of consecutive periods over a fixed length of time.

Compounded Quarterly

When an investment's interest is compounded quarterly, the interest is calculated and added to the principal four times a year.

Perpetuity

A financial instrument that provides a stream of infinite cash flows or payments.

Compounded Monthly

Interest calculated on the initial principal and also on the accumulated interest of previous periods, done monthly.