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

question 18

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) none of the above.

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Definitions:

Contract

A legally binding agreement between two or more parties that outlines obligations and rights of those involved.

Compounded Annually

Interest that is calculated once a year and added to the principal, which then earns interest the following year.

Investment

The act of allocating resources, usually money, in the expectation of generating an income or profit.

Compounded Annually

Interest on an investment or loan calculated once a year, where the interest is added to the principal.