Question 2a) A firm that employs a relatively large proportion of debt in its ca

Question

Question 2a) A firm that employs a relatively large proportion of debt in its capital structure will have a relatively ____ degree of financial leverage.

-LOW

  high

  insignificant

  constant

Question 1b)

A DFL (degree of financial leverage) of 3.0 indicates that a 27% increase in EPS is the result of a ____ increase in EBIT.(hint: the EBIT moves __% causing a magnified increase 3 times that in EPS.)

-81%

  3%

  9%

  6%

Question 1c)Financial leverage increases a firm's ROE and EPS under which of the following circumstances?ROCE= Return on Capital Employed

  ROCE = cost of debt

  ROCE> after tax cost of debt

  ROCE>pre tax cost of debt

  ROCE = cost of equity

Explanation / Answer

Answer for question 1

A firm that employs a relatively large proportion of debt in its capital structure will have a relatively High degree of financial leverage.

Hence, Option (B) is correct answer.

Answer for question 2

Degree of financial leverage of 3.0 indicates that a 27% increase in EPS is the result of a 9% (27/% / 3) increase in EBIT.

Hence, option (C) is correct answer.

Answer for question 3

Financial leverage increases a firm's ROE and EPS if return on capital employed is more than after tax cost of debt.

Hence, Option (B) is correct answer.

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