Which of the Following Is True of Leverage

question 36

Multiple Choice

Which of the following is true of leverage?

• A) It refers to the effects that operating and financial fixed costs have on the returns that shareholders earn.
• B) It is associated with risks which are out of the control of managers.
• C) It includes the effect of operating fixed costs on the returns of shareholders and not the financial fixed costs.
• D) It is used to evaluate the profitability associated with various levels of sales.

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Definitions:

Operating Leverage

A financial ratio that measures the degree to which a firm can increase operating income by increasing revenue, highlighting the impact of fixed versus variable costs.

Income Statement

A document detailing a firm's income, expenditures, and profit during a certain timeframe.

Operating Leverage

refers to the extent to which a firm utilizes fixed costs in its cost structure, influencing how changes in sales volume affect operating income.

Net Operating Income

This is a company's income after all operating expenses, excluding financial expenses and taxes, have been deducted from total revenue.