If the Degree of Accounting Operating Leverage Is 1

question 10

Multiple Choice

If the degree of accounting operating leverage is 1.3 for a firm, then a 10 percent increase in revenue should drive a:

• A) 12% increase in pretax operating cash flows.
• B) 13% increase in EBIT.
• C) 30% increase in EBIT.
• D) 1.3% increase in pretax operating cash flows.

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Definitions:

Consolidated Stockholders' Equity

The total equity in a conglomerate of all the shareholders combined, as if the conglomerate and its subsidiaries were a single entity.

Investment Income

Income received from investment assets, including dividends, interest, and capital gains.

Book Value

The amount of value remaining in a company's assets, after accounting for depreciation and amortization, that shareholders would theoretically receive if assets were liquidated.

IntrA-Entity Gains

Profits realized from transactions occurring within the same company, often between different divisions or subsidiaries.