The Use of Financial Leverage by the Firm Has a Potential

question 11

Multiple Choice

The use of financial leverage by the firm has a potential impact on which of the following?
(1) The risk associated with the firm.
(2) The return experienced by the shareholder.
(3) The variability of net income.
(4) The degree of operating leverage.
(5) The degree of financial leverage.

• A)1, 3, 5
• B)1, 2, 5
• C)2, 3, 5
• D)2, 3, 4, 5
• E)1, 2, 3, 5

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Definitions:

Traditional System

A cost accounting system that allocates overhead based on a single or few measures of activity, such as direct labor hours or machine hours.

Predetermined Overhead Rate

A rate used to apply manufacturing overhead to products, calculated before the period begins based on estimated costs and activity levels.

Direct Labor Cost

The expense associated with labor directly involved in the manufacturing of a product.

Direct Labor-Hours

The cumulative hours spent by workers actively engaged in creating a product during the manufacturing stage.