If a Firm Uses Debt Financing (Debt Ratio = 0

question 10

Multiple Choice

If a firm uses debt financing (Debt ratio = 0.40) and sales change from the current level,which of the following statements is CORRECT?

• A)The percentage change in operating income (EBIT) resulting from the change in sales will exceed the percentage change in net income.
• B)The percentage change in EBIT will equal the percentage change in net income.
• C)The percentage change in net income relative to the percentage change in sales (and in EBIT) will not depend on the interest rate paid on the debt.
• D)The percentage change in operating income will be less than the percentage change in net income.
• E)Since debt is used, the degree of operating leverage must be greater than 1.

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Definitions:

Reaction Formation

A defense mechanism in which unacceptable thoughts or desires are expressed as their opposites, often to hide one's true feelings.

Great Admiration

A feeling of profound respect and deep appreciation for someone or something's qualities or achievements.

Homosexual Desires

Sexual attraction or desire between members of the same sex.

Defense Mechanism

Psychological strategies brought into play by the unconscious mind to manipulate, deny, or distort reality in order to defend against feelings of anxiety and unacceptable impulses.