The Degree of Financial Leverage Has Which of the Following

question 65

Multiple Choice

The degree of financial leverage has which of the following characteristics?

• A) The closer the firm is operating to its financial breakeven point,the smaller the DFL.
• B) Other things held constant,if a firm has fixed financial costs,such as interest,a change in EBIT will result in an equivalent change in EPS.
• C) For a particular firm,the DFL is not a fixed number⎯its value depends on the level of operations and the fixed financial costs associated with those operations.
• D) The DFL relates the change in EBIT to the change in sales.
• E) If a firm has common stock,it is impossible for its DFL to equal 1.0.

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Definitions:

High Barriers

Obstacles that make it difficult for new competitors to enter a market, including high start-up costs, complex regulations, or strong brand loyalty.

Market Entry

The strategy or process involved in introducing a new product or service to a target market.

Unregulated Monopolists

Firms that maintain exclusive control over a particular market or product without any oversight or restrictions from regulatory bodies.

Oligopolistic Markets

Markets dominated by a few large suppliers who have some control over the prices due to the limited number of competitors.