Financial Leverage Measures the Effect of Fixed Financing Costs on the Relationship

question 143

Multiple Choice

Financial leverage measures the effect of fixed financing costs on the relationship between ________.

• A) sales and EBIT
• B) sales and EPS
• C) EBIT and EPS
• D) net income and sales

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Definitions:

Potential Output

The highest level of real GDP that an economy can achieve when it is operating at full capacity, without causing inflation.

Recessionary Gap

A situation where an economy's real GDP is lower than its potential GDP, leading to underutilized resources and higher unemployment.

Potential Output

The maximum amount of goods and services an economy can produce when it is using all of its resources efficiently.

Deadweight Loss

A loss of economic efficiency that can occur when the equilibrium for a good or a service is not achieved or is not achievable, often due to market failure or intervention.