Top-Shelf Construction Discovered That for Every 1 Percent Decrease in Its

question 2

Multiple Choice

Top-Shelf Construction discovered that for every 1 percent decrease in its sales, its earnings before interest and taxes (EBIT) decrease by 3.2 percent. Based on this information, we know that Top-Shelf Construction has a:

• A)debt/assets ratio equal to 3.2 times its debt/equity ratio.
• B)degree of operating leverage (DOL) equal to 3.2.
• C)current ratio (= Current assets/Current liabilities) equal to 3.2.
• D)degree of total leverage equal to 3.2.
• E)degree of financial leverage (DFL) equal to 3.2.

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Definitions:

Actual Annual

Refers to the true or realistic yearly financial or quantitative performance or output of an entity or activity.

Interest Rate

The cost of borrowing money or the return for investing money, usually expressed as a percentage of the principal amount per year.

Economic Rent

The portion of income earned from a factor of production (land, labor, or capital) that exceeds the minimum amount necessary for it to be utilized in its current use.

Natural Resources

Materials or substances occurring in nature which can be exploited for economic gain, such as minerals, forests, water, and fertile land.