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Financial leverage affects both EPS and EBIT

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6. Financial leverage affects both EPS and EBIT.
a. true

b. false

8. If debt financing is used, which of the following is true?

a. In response to a given percentage change in sales, the percentage change in operating income is greater than the percentage change in net income.

b. In response to a given percentage change in sales, the percentage change in operating income is equal to the percentage change in net income.

c. In response to a given percentage change in sales, the percentage change in net income is greater than the percentage change in operating income.

d. The degree of operating leverage is greater than 1.

9. As a general rule, the capital structure that maximizes firm value, or stock price also

a. mximizes the expected rate of return on equity (ROE)

b. maximizes the weighted average cost of capital (WACC)

c. minimizes the weighted average cost of capital (WACC)

d. maximizes EPS

e. minimizes bankruptcy costs

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6. Financial leverage affects both EPS and EBIT.
b. false

8. If debt financing is used, which of the ...

Solution Summary

This post answers three multiple choice questions.

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Leverage that Affects EBIT and EPS

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I heard something from Bob the bartender the other day (Joe, the former bartender, left to form a financial consulting company). He said one type of leverage affects both EBIT and EPS. I wonder what that meant. Then he said the other type of leverage affects only EPS. I really need some help on this one. What do you think he meant by each of his statements?

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