Company D Has a 50% Debt Ratio,whereas Company E Has

question 13

Multiple Choice

Company D has a 50% debt ratio,whereas Company E has no debt financing.The two companies have the same level of sales and the same degree of operating leverage.Which of the following statements is most CORRECT?

• A)If sales increase 10% for both companies, then Company D will have a larger percentage increase in its net income.
• B)If sales increase 10% for both companies, then Company D will have a larger percentage increase in its operating income (EBIT).
• C)If EBIT increases 10% for both companies, then Company D's net income will rise by more than 10%, while Company E's net income will rise by less than 10%.
• D)Company E has a higher degree of financial leverage.
• E)The two companies have the same degree of total leverage.

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Definitions:

Owner's Equity

The net worth of an owner in a company, calculated as the difference between the company's assets and liabilities.

Liabilities

Financial obligations or debts of a business that are due to be paid to creditors in the future.

Accounting Equation

The foundational principle in accounting that states assets equal liabilities plus shareholders' equity.

Profitable

Refers to a financial state where income exceeds expenses, resulting in a positive gain.