Which of the Following Is the Correct Interpretation of a Degree

question 40

Multiple Choice

Which of the following is the correct interpretation of a degree of operating leverage of 5?

• A) Operating leverage of 5 means that sales can decrease by 5% before the firm's current level of sales will hit the break-even point.
• B) Operating leverage of 5 means that if sales increase by 5% the firm will hit its break-even point.
• C) Operating leverage of 5 means that if sales increase by 5%, there will be a 25% increase in the firm's pretax profit.
• D) Operating leverage of 5 measures the degree of debt employed by the firm's debt structure.
• E) Operating leverage of 5 means that the company would need to increase sales by 5 times in order to hit its break-even point.

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Definitions:

Balance Sheet

A financial statement summarizing a company's assets, liabilities, and shareholders' equity at a specific point in time.

Retained Earnings

The portion of net income left over for the business after it has paid out dividends to its shareholders.

Contributed Capital

The capital that shareholders contribute to a company beyond the par value of the shares they purchase.

Preferred Stock

A class of ownership in a corporation with a higher claim on assets and earnings than common stock, typically with predetermined dividend payments.