Which of the Following Statements About Financial Leverage Is True

question 7

Multiple Choice

Which of the following statements about financial leverage is true?

• A) Financial leverage is the responsiveness of the firm's EBIT to fluctuations in sales.
• B) Financial leverage involves the incurrence of fixed operating costs in the firm's income stream.
• C) Financial leverage is the responsiveness of the firm's EPS to fluctuations in EBIT.
• D) Financial leverage reduces a firm's risk.

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Definitions:

Cost Driver

A factor that causes a change in the cost of an activity or a product, such as production volume or labor hours.

Activity-based Costing

A methodology that assigns production costs to products based on the activities required to produce them, aiming for more accurate cost allocation.

Volume-based

A pricing or costing method that changes based on the amount of goods or services produced or sold.

Non-volume-based

Refers to costing methods that allocate costs based on factors other than the volume of production, such as time or complexity.