Leverages – Financial Management MCQ

Leverages – CS Executive Financial and Strategic Management MCQ Questions with Answers you can quickly revise the concepts.

Leverages – Financial Management MCQ

Question 1.
The term Leverage in general refers to a ……………
(A) Relationship between fixed cost and profit.
(B) Relationship between sales and fixed cost.
(C) Relationship between two interrelated variables.
(D) Relationship between two unrelated variables.
Answer:
(C) Relationship between two interrelated variables.

Question 2.
In financial analysis Leverage represents the influence of one over some other related
(A) Non-financial variable; financial variable
(B) Financial variable; financial variable
(C) Financial variable; non-financial variable
(D) Variable relating to revenue; financial variable
Answer:
(B) Financial variable; financial variable

Question 3.
Which of the following is not commonly used measures of leverage in financial analysis?
(A) Operating Leverage
(B) Financial Leverage
(C) Combined Leverage
(D) Matrix Leverage
Answer:
(D) Matrix Leverage

Question 4.
………….. is the ratio of net operating income before fixed charges to net operating income after fixed charges.
(A) Financial Leverage
(B) Operating Leverage
(C) Operation Leverage
(D) Fiscal Leverage
Answer:
(B) Operating Leverage

Question 5.
Operating leverage indicates the tendency of operating probts (EBIT) to vary disproportionately with –
(A) Probt
(B) Fixed cost
(C) Sales
(D) EPS
Answer:
(C) Sales

Question 6.
Degree of ………… is the ratio of the percentage increase in earning per share (EPS) to the percentage increase in earnings before interest and taxes (EBIT).
(A) Operating Leverage
(B) Combined Leverage
(C) Working Capital Leverage
(D) Financial Leverage
Answer:
(D) Financial Leverage

Question 7.
There is no operating leverage if there is no …………
(A) Probt
(B) Sales
(C) Fixed cost
(D) EPS
Answer:
(C) Fixed cost

Question 8.
EBIT is usually the same thing as: …………
(A) Funds provided by operations
(B) Earnings before taxes
(C) Net income
(D) Operating probt
Answer:
(D) Operating probt

Question 9.
Which of the following is correct formula to calculate Operating Leverage?
Leverages – Financial Management MCQ 1
Answer:
(A)

Question 10.
In the context of operating leverage break-even analysis, if selling price per unit rises and all other variables remain constant, the operating break-even point in units will:
(A) Fall
(B) Rise
(C) Stay the same
(D) Still be indeterminate until interest and preferred dividends paid are known
Answer:
(A) Fall

Question 11.
Which of the following is correct formula to calculate Operating Leverage?
Leverages – Financial Management MCQ 2
Answer:
(C)

Question 12.
A firm’s degree of total leverage (DTL) is equal to its degree of operating leverage its degree of financial leverage (DFL).
(A) Plus
(B) Minus
(C) Divided by
(D) Multiplied by
Answer:
(D) Multiplied by

Question 13.
If operating leverage is 4, this means that –
(A) 4% change in sales will cause 1% change in EBIT.
(B) 1% change in sales will cause 4% change in EBIT.
(C) 1% change in sales will cause 4% change in EPS.
(D) 4% change in sales will cause 1% change in EPS.
Answer:
(B) 1% change in sales will cause 4% change in EBIT.

Question 14.
Degree of total leverage can applied in measuring change in –
(A) EBIT to a percentage change in sales
(B) EPS to a percentage change in EBIT
(C) EPS to a percentage change in sales
(D) Sales to a percentage change in EBIT
Answer:
(C) EPS to a percentage change in sales

Question 15.
If the fixed costs are high, the operating leverage will also be –
(A) Low
(B) High
(C) Zero
(D) Negative
Answer:
(B) High

Question 16.
Measure of business risk is –
(A) Operating leverage
(B) Financial leverage
(C) Combines leverage
(D) Working capital leverage
Answer:
(A) Operating leverage

Question 17.
The presence of fixed costs in the total cost structure of a firm results into –
(A) Financial Leverage
(B) Operating Leverage
(C) Super Leverage
(D) Progressive leverage
Answer:
(B) Operating Leverage

Question 18.
A high operating leverage indicates –
(A) Highly favourable situation as it consists of low fixed costs.
(B) Highly risky situation as it consists of large interest costs.
(C) Highly favourable situation as it consists of higher EPS.
(D) Highly risky situation as it consists of large fixed costs.
Answer:
(D) Highly risky situation as it consists of large fixed costs.

Question 19.
Match List-I with List-II and select the correct answer using the codes given below the lists
Leverages – Financial Management MCQ 3.
Answer:
(C)

Question 20.
Operating leverage depends on –
I. Contribution
II. Interest cost
III. Fixed cost
IV. Volume of sales
V. EPS
VI. Profit after tax (PAT)
Select correct answer from the options given below:
(A) I, IV, III
(B) II, V,VI
(C) I, III, V
(D) VI, I, III
Answer:
(A) I, IV, III

Question 21.
Which of the following is correct formula to calculate Financial Leverage?
Leverages – Financial Management MCQ 4
Answer:
(D)

Question 22.
A firm has a DOL of 4.5 at Q units. What does this tell us about the firm?
(A) If sales rise by 4.5%, then EBIT will rise by 1%.
(B) If EBIT rises by 4.5%, then EPS will rise by 1%.
(C) If EBIT rises by 1 %, then EPS will rise by 4.5%.
(D) If sales rise by 1 %, then EBIT will rise by 4.5%
Answer:
(D) If sales rise by 1 %, then EBIT will rise by 4.5%

Question 23.
High operating leverage shows –
(A) Higher burden of fixed cost and high EBIT.
(B) Low burden of fixed cost and high EBIT.
(C) Higher burden of fixed cost and low EBIT.
(D) Low burden of fixed cost and low EBIT.
Answer:
(C) Higher burden of fixed cost and low EBIT.

Question 24.
Operating leverage is directly ………. to business risk.
(A) Proportional
(B) Not proportional
(C) Unrelated
(D) Not related
Answer:
(A) Proportional

Question 25.
A firm has a DFL of 5.5. What does this tell us about the firm?
(A) If sales rise by 5.5%, then EBIT will rise by 1%.
(B) If EBIT rises by 5.5%, then EPS will rise by 1%.
(C) If EBIT rises by 1 %, then EPS will rise by 5.5%.
(D) If sales rise by 1 %, then EBIT will rise by 5.5%.
Answer:
(C) If EBIT rises by 1 %, then EPS will rise by 5.5%.

Question 26.
More operating leverage leads to –
(A) Less financial risk
(B) More financial risk
(C) More business risk
(D) Less business risk
Answer:
(C) More business risk

Question 27.
Which of the following is correct formula to calculate Financial Leverage?
Leverages – Financial Management MCQ 5
Answer:
(A)

Question 28.
Higher operating leverage is related to the use of additional
(A) Fixed costs
(B) Variable costs
(C) Debt financing
(D) Common equity financing
Answer:
(A) Fixed costs

Question 29.
Financial leverage indicates –
(A) The tendency of profit before tax (PBT) to vary disproportionately with sales.
(B) The tendency of sales to vary disproportionately with fixed cost.
(C) The tendency of profit after tax (PAT) to vary disproportionately with fixed cost.
(D) The tendency of profit before tax (PBT) to vary disproportionately with operating profit (EBIT).
Answer:
(D) The tendency of profit before tax (PBT) to vary disproportionately with operating profit (EBIT).

Question 30.
Lower financial leverage is related to the use of additional
(A) Fixed costs
(B) Variable costs
(C) Debt financing
(D) Common equity financing
Answer:
(D) Common equity financing

Question 31.
The operating leverage indicates the impact of changes in sales on –
(A) Operating income
(B) Operating cost
(C) Operating profit after tax
(D) Operating sales
Answer:
(A) Operating income

Question 32.
Match List-I with List-II and select the correct answer using the codes given below the lists:
Leverages – Financial Management MCQ 6
Answer:
(C)

Question 33.
If financial leverage is 2.5, this means that -……….
(A) 2.5% change in EBIT will cause 1% change in EBT
(B) 1% change in sales will cause 2.5% change in EBT
(C) 2.5% change in sales will cause 1% change in EBT
(D) 1% change in EBIT will cause 2.5% change in EBT
Answer:
(D) 1% change in EBIT will cause 2.5% change in EBT

Question 34.
Which of the following is correct formula to calculate Financial Leverage (FL) when capital structure consists of preference shares and equity shares?
Leverages – Financial Management MCQ 7
Answer:
(C)

Question 35.
Which of the following formulas represents a correct calculation of the degree of operating leverage?
(A) (Q-Qbe)/Q
(B) (EBIT)/(EBIT – FC)
(C) [Q(P – V) + FC]/[Q(P – V)]
(D) [Q(P – V)]/[Q(P – V) – FC]
Answer:
(D) [Q(P – V)]/[Q(P – V) – FC]

Question 36.
Where a company has large amount of fixed interest charges, the financial leverage will be
(A) High
(B) Low
(C) Negative
(D) Unreliable
Answer:
(A) High

Question 37.
Which of the following formulas represents the correct calculation of the degree of financial leverage?
(A) [NI + T + I]/[NI -I – PD/(1 – T)]
(B) EBIT/[EBIT -1 – PD/(1 – T)]
(C) EBIT/[NI -1 – PD/(1 – T)]
(D) All of the above are correct methods to calculate the degree of financial leverage (DFL).
Answer:
(B) EBIT/[EBIT -1 – PD/(1 – T)]

Question 38.
The maximum amount of debt (and other fixed-charge financing) that a firm can adequately service is referred to as the …………………
(A) debt capacity
(B) debt-service burden
(C) adequacy capacity
(D) fixed-charge burden
Answer:
(A) debt capacity

Question 39.
High financial leverage is not good as is it indicates the large content of –
(A) Fixed cost
(B) Fixed interest charges
(C) Variable cost charges
(D) Contribution
Answer:
(B) Fixed interest charges

Question 40.
The cash required during a specific period to meet interest expenses and principal payments is referred to as the:
(A) Debt capacity
(B) Debt-service burden
(C) Adequacy capacity
(D) Fixed-charge burden
Answer:
(B) Debt-service burden

Question 41.
Earnings to equity shareholders (EPS) will fluctuate violently if –
(A) Financial leverage is very high
(B) Operating leverage is very high
(C) Working capital leverage is very high
(D) Operating leverage is very low
Answer:
(A) Financial leverage is very high

Question 42.
If the Return on Investment (ROI) exceeds the rate of interest on debt, it is financial leverage.
(A) Unfavourable
(B) Adverse
(C) A favourable
(D) Negative
Answer:
(C) A favourable

Question 43.
Which one of the following is correct?
(i) Liquidity ratios measure’s long term solvency of a concern.
(ii) Inventory is a part of liquidity assets.
(iii) Financial leverage is related to business risk.
(iv) The amount of gross assets is equal to net capital employed.
Select the correct answer from the options given below:
(A) (i), (ii) and (iv)
(B) (ii), (iii) and (iv)
(C) (i), (ii), (iii) and (iv)
(D) None of the above
Answer:
(D) None of the above

Question 44.
High operating leverage combined with high financial leverage will constitute –
(A) Favourable situation
(B) Positive situation
(C) Less risky situation
(D) Risky situation
Answer:
(D) Risky situation

Question 45.
Read the following statement.
(i) With the increase in fixed cost operating leverage diminishes.
(ii) Net working Capital is the excess of current assets over current liabilities.
(iii) Greater the size of the business unit larger will be the requirement of working capital.
(iv) Working Capital is also known as circulating capital.
Which of the above statement is correct?
(A) (i), (ii) and (iii)
(B) (ii), (iii) and (iv)
(C) (iii), (iv) and (i)
(D) (i), (ii) and (iv)
Answer:
(B) (ii), (iii) and (iv)

Question 46.
Which of the following can be treated as ‘Ideal Situation?
(A) High operating cost and low financial leverage.
(B) Low operating leverage and high financial leverage.
(C) Operating & financial leverage both should below.
(D) Operating & financial leverage both should be high.
Answer:
(C) Operating & financial leverage both should below.

Question 47.
Assertion (A):
High operating leverage shows higher burden of fixed cost.
Reason (R):
As fixed cost goes on increasing EBIT reduces.
Select the correct answer from the options given below:
(A) (A) is correct but (R) is incorrect.
(B) (A) is incorrect but (R) is correct.
(C) Both (A) and (R) are not correct.
(D) (A) is correct and (R) is correct explanation of (A)
Answer:
(D) (A) is correct and (R) is correct explanation of (A)

Question 48.
Which of the following statement is correct?
(A) If a business firm has a lot of variable costs as compared to fixed costs, then the firm is said to have high operating leverage.
(B) Combined Leverage = % change in EPS multiplied by % change in Sales
(C) If a business firm has a lot of fixed costs as compared to variable costs, then the firm is said to have high operating leverage.
(D) If contribution is less than fixed cost, operating leverage will be favourable and vice versa.
Answer:
(C) If a business firm has a lot of fixed costs as compared to variable costs, then the firm is said to have high operating leverage.

Question 49.
Operating leverage may be defined as:
(A) the degree to which debt is used in financing the firm
(B) the difference between price and variable costs
(C) the extent to which capital assets and fixed costs are utilized
(D) the difference between fixed costs and the contribution margin
Answer:
(C) the extent to which capital assets and fixed costs are utilized

Question 50.
Degree of ………….. is the ratio of percentage change in earning per share to the percentage change in sales.
(A) Financial leverage
(B) Operating leverage
(C) Combined leverage
(D) Working leverage
Answer:
(C) Combined leverage

Question 51.
The conservative firm will utilize:
(A) High fixed costs
(B) High degree of operating leverage
(C) Low degree of operating leverage
(D) Low profit margin
Answer:
(C) Low degree of operating leverage

Question 52.
Which of the following is correct formula to calculate Combined Leverage when capital structure consists of preference shares and equity shares?
Leverages – Financial Management MCQ 8
Answer:
(D)

Question 53.
Which one of the following is correct?
(I) Hard core working capital assets may be defined as that part of the current assets which represent the very minimum level of raw materials, work-in-process, finished goods, stores, debtors and cash which are in circulation to ensure continuity of production.
(II) Operating leverage is the ratio of fixed cost to net operating income after tax.
Select the correct answer from the options given below:
(A) Statement I correct while Statement II is incorrect.
(B) Statement II correct while Statement I is incorrect.
(C) Both Statement I and Statement II are incorrect.
(D) Both Statement I and Statement II are correct.
Answer:
(A) Statement I correct while Statement II is incorrect.

Question 54.
Which of the following statement is true?
(1) If contribution exceeds fixed cost, operating leverage will be favourable and vice versa.
(2) If ROI exceeds the rate of interest on debt, financial leverage will be favourable and vice versa.
Select correct answer from the options given below:
(A) (1) only
(B) (2) only
(C) Both (1) and (2)
(D) Neither (1) nor (2)
Answer:
(C) Both (1) and (2)

Question 55.
Indentify incorrect statement.
1. Securitization is short term finance arrangement.
2. If ROI is exactly equal to the rate of interest on debt, there is no financial leverage and EPS will not be affected.
3. A negative working capital means the company currently is unable to meet its long-term liabilities.
4. A desire to maintain an established dividend policy may affect the volume of working capital, or changes in working capital may bring about an adjustment of dividend policy.
Select correct answer from the options given below:
(A) 2 & 4
(B) 1 & 3
(C) 1 & 4
(D) 2 & 3
Answer:
(B) 1 & 3

Question 56.
Assertion (A):
Financial leverage indicates the tendency of EBT to vary disproportionately with operating profit.
Reason (R):
Management wants to maximize EPS and in doing so it also satisfies the primary goal of financial management i e. maximization of the owner’s wealth as represented by the value of business.
Select correct answer from the options given below:
(A) Both A and Rare true and R is correct explanation of A.
(B) Both A and R are true but R is not correct explanation of A.
(C) A is true but R is false.
(D) A is false but R is true.
Answer:
(B) Both A and R are true but R is not correct explanation of A.

Question 57.
The relationship between the cost of equity and financial leverage in accordance with MM proposition II can be expressed by-
(A) R = Equity/100
(B) R = Equity/Debt × 100
(C) R=ro + (ro-rd)(1-Tc)
(D) R = Equity/Income
Answer:
(C) R=ro + (ro-rd)(1-Tc)

Question 58.
Match List-I with List-II and select the correct answer using the codes given below the lists:
Leverages – Financial Management MCQ 9
Answer:
(C)

Question 59.
Degree of Combined leverage can be obtained by –
(A) EBIT + Fixed Costs/EBIT – Interest Expense
(B) EBT/Sales
(C) Sales/Contribution × 100
(D) Sales/Cash × 100
Answer:
(A) EBIT + Fixed Costs/EBIT – Interest Expense

Question 60.
Match List-I with List-Il and select the correct answer using the codes given below the lists:
Leverages – Financial Management MCQ 10
Answer:
(A)

Question 61.
Match List-I with List-II and select the correct answer using the codes given below the lists:
Leverages – Financial Management MCQ 11
Answer:
(D)

Question 62.
Factoring is a -……………
(A) Financial Planning
(B) Production Plan
(C) Cost of Sales
(D) New Financial Service
Answer:
(D) New Financial Service

Question 63.
Degree of operating leverage can be computed by
(A) % change in Operating Income /% change in sales
(B) 96 Sales/% Profit
(C) Sales/Cost of Production
(D) Sales/Fixed Cost
Answer:
(A) % change in Operating Income /% change in sales

Question 64.
Which formula may be used for ‘EPS?
(A) Net Profit/100 × Share Capital
(B) Dividend/Net Profit × 100
(C) Net Income – Dividend on Preferred Stock/Average outstanding Shares
(D) Net Profit/Sales
Answer:
(C) Net Income – Dividend on Preferred Stock/Average outstanding Shares

Question 65.
Factoring involves –
(A) Purchase and collection of debts
(B) Sales ledger management
(C) Provision of specialized services relating to credit investigation
(D) All of the above
Answer:
(D) All of the above

Question 66.
Capital Employed is –
(A) Fixed Assets + Cash + Bank
(B) Shareholders Funds + Long Term Funds
(C) Assets – Net Worth
(D) Long Term Funds + Current Liabilities – Current Assets
Answer:
(B) Shareholders Funds + Long Term Funds

Question 67.
A firm with high operating leverage has:
(A) Low fixed costs in its production process.
(B) High variable costs in its production process.
(C) High fixed costs in its production process.
(D) High price per unit.
Answer:
(C) High fixed costs in its production process.

Question 68.
A firm with high operating leverage is characterized by while one with high financial leverage is characterized by ………..
(A) Low fixed cost of production; low fixed financial costs
(B) High variable cost of production; high variable financial costs
(C) High fixed costs of production; high fixed financial costs
(D) Low costs of production; high fixed financial costs
Answer:
(C) High fixed costs of production; high fixed financial costs

Question 69.
If three Options are available to the company and operating leverage is same in all the three options; however, financial leverage is increasing then combined leverage will be –
(A) Same in all the three options
(B) Increasing in all the three options
(C) Dressing in all the three options
(D) Not possible to tell without figures.
Answer:
(B) Increasing in all the three options

Question 70.
If financial leverage in one then which of following two figures will be the same –
(A) Sales; contribution
(B) Contribution; EBIT
(C) EBIT; EBT
(D) None of the above
Answer:
(C) EBIT; EBT

Question 71.
In which of the following case it can be said that the firm has favourable financial leverage?
(A) When interest on loan funds is greater than internal rate of return (IRR).
(B) When interest on loan funds is less than return on investment (ROI).
(C) When return on investment (ROI) is equal to than internal rate of return (IRR).
(D) When return on investment (ROI) is greater than interest on loan funds.
Answer:
(D) When return on investment (ROI) is greater than interest on loan funds.

Question 72.
As compared to other firms in the industry, the company has high beta and high operating leverage. It shows that –
(A) Company is in more risk as compared to other firms in the industry.
(B) Company is in less risk as compared to other firms in the industry.
(C) Company’s risk and risk of all other firms in the industry is same.
(D) None of the above
Answer:
(A) Company is in more risk as compared to other firms in the industry.

Question 73.
Combined leverage shows –
Leverages – Financial Management MCQ 12
Answer:
(D)

Question 74.
Which of the following figure is not required to calculate operating leverage?
(A) Contribution
(B) EBIT
(C) EPS
(D) All of the above
Answer:
(C) EPS

Question 75.
Which of the following figure is not required to calculate financial leverage?
(A) EBT
(B) Contribution
(C) Sales
(D) Market price
Answer:
(D) Market price

Question 76.
Output (units) = 3,00,000 Fixed cost = ₹ 3,50,000 Unit variable cost = ₹ 1.00 Interest expenses = ₹ 25,000 Unit selling price = ₹ 3.00 Applicable tax rate is 3596 Calculate Operating Leverage.
(A) 1.11
(B) 2.40
(C) 2.67
(D) 1.07
Answer:
(B) 2.40
Leverages – Financial Management MCQ 61
Leverages – Financial Management MCQ 62

Question 77.
Output (units) = 3,00,000 Fixed cost = ₹ 3,50,000 Unit variable cost = ₹ 1.00 Interest expenses = ₹ 25,000 Unit selling price = ₹ 3.00 Applicable tax rate is 3596 Calculate Financial Leverage.
(A) 1.11
(B) 2.40
(C) 2.67
(D) 1.07
Answer:
(A) 1.11
Leverages – Financial Management MCQ 61
Leverages – Financial Management MCQ 62

Question 78.
Output (units) = 3,00,000 Fixed cost = ₹ 3,50,000 Unit variable cost = ₹ 1.00 Interest expenses = ₹ 25,000 Unit selling price = ₹ 3.00 Applicable tax rate is 3596 Calculate Combined Leverage.
(A) 2.67
(B) 2.30
(C) 2.00
(D) 2.15
Answer:
(A) 2.67
Leverages – Financial Management MCQ 61
Leverages – Financial Management MCQ 62

Question 79.
If operating leverage is 2.1429 and financial leverage is 1.0699 then combined leverage will be -………….
(A) 2.2927
(B) 2.0029
(C) 0.4993
(D) Data given is not sufficient
Answer:
(A) 2.2927
Combined Leverage = 2.1429 × 1.0699 = 2.2927

Question 80.
If combined leverage is 2 and financial leverage is 1.25 then operating leverage will be -……………
(A) 0.625
(B) 2.50
(C) 1.60
(D) Data given is not sufficient
Answer:
(C) 1.60
Combined Leverage = Operating Leverage × Financial Leverage
2 = x × 1.25
x = Operating Leverage = 2/1.25 = 1.6

Question 81.
If combined leverage is 2.2926 and operating leverage is 2.1429 then financial leverage will be
(A) 1.0699
(B) 0.9347
(C) 4.9128
(D) Data given is not sufficient
Answer:
(A) 1.0699

Question 82.
A company has sales of ₹ 1 lakh. The variable costs are 40% of the sales while the fixed operating costs amount to ₹ 30,000. The amount of interest on long-term debts is ₹ 10,000. You are required to calculate the combined leverage.
(A) 4
(B) 2
(C) 3
(D) 5
Answer:
(C) 3
Leverages – Financial Management MCQ 27

Question 83.
Operating leverage is 4. This means 10% change in sales will cause -……………
(A) 4% change in variable cost
(B) 40% change in EPS
(C) 4% change in EBIT
(D) 40% change in EBIT
Answer:
(D) 40% change in EBIT

Question 84.
Financial leverage is 2.5. This means 10% change in EBIT will cause -……….
(A) 2.5% change in EBT
(B) 2.5% change in EPS
(C) 25% change in sales
(D) 25% change in EBT and EPS
Answer:
(D) 25% change in EBT and EPS

Question 85.
Combined leverage is 3.125. This means 10% change in Sales will cause -…………..
(A) 31.25% change in PAT
(B) 31.25% change in EPS
(C) 31.25% change in capital employed
(D) Both (A) and (B)
Answer:
(D) Both (A) and (B)

Question 86.
If there is a 10% increase in sale, EBIT increase by 35% and if sales increase by 6%, taxable income will increase by 24%. Operating leverage must be –
(A) 1.15
(B) 3.50
(C) 4.00
(D) 2.67
Answer:
(B) 3.50
If there is a 10% increase in sale, EBIT increase by 35% (10 × 3.5). Concept of operating leverage applied.

Question 87.
If EBIT increases by 6%, taxable income increases by 6.9%. If sales increase by 6%, taxable income will increase by 24%.
Financial leverage must be -………….
(A) 1.19
(B) 1.13
(C) 1.12
(D) 1.15
Answer:
(D) 1.15
If EBIT increases by 6% taxable income increase by 6.9% (6 × 1.15). Concept of financial leverage applied.

Question 88.
If sales increase by 6% taxable income ie. PAT and EPS will increase by 24%.
Combined leverage must be –
(A) 3
(B) 4
(C) 5
(D) 6
Answer:
(B) 4
If sales increase by 6% taxable income will increase by 24% (6 × 4). Concept of combined leverage applied.

Question 89.
The capital structure of a company consists of the following securities.
10% Preference Share Capital — 1,00,000
Equity Share Capital (₹ 10 Shares) — 1,00,000
12% Debenture — 75,000
The amount of operating profit is ₹ 69,000. The company is in 35% tax bracket. You are required to calculate the financial leverage of the company.
(A) 1.1500
(B) 1.5466
(C) 1.1566
(D) 1.1554
Answer:
(B) 1.5466
Leverages – Financial Management MCQ 63

Question 90.
Operating leverage is 7 and financial leverage is 2.2858. How much change in sales will be required to bring 70% change in EBIT?
(A) 10%
(B) 70%
(C) 11.429%
(D) 30%
Answer:
(A) 10%

Question 91.
Financial leverage = 1.5465 EBIT = ₹ 1,38,000
Interest = ₹ 18,000 Tax rate = 35%.
Capital structure of the company consists of equity shares and preference shares.
Amount of Preference Dividend = ?
(A) ₹ 19,950
(B) ₹ 19,898
(C) ₹ 20,000
(D) ₹ 19,899
Answer:
(C) ₹ 20,000

Question 92.
Total assets of Alpha Company are ₹ 3,00,000. The company’s total assets turnover ratio is 3, its fixed operating cost is ₹ 1,50,000 and its variable operating cost ratio is 50%. The income-tax rate is 50%. It also has long term debts of ₹ 1,20,000 on which interest @ 10% is payable. Operating, Financial & Combined Leverages of the company are –
(A) 1.5; 1.042; 1.563 respectively
(B) 1.05; 1.42; 1.05625 respectively
(C) 1.50; 1.42; 2.13 respectively
(D) 1.55; 1.042; 1.6151 respectively
Answer:
(A) 1.5; 1.042; 1.563 respectively
Leverages – Financial Management MCQ 28
Leverages – Financial Management MCQ 29

Question 93.
Contribution = ₹ 4,00,000
EBIT = ₹ 3,00,000
10% Debenture = ₹ 6,00,000
Combined leverage = ?
(A) 1.63
(B) 1.66
(C) 1.68
(D) 1.62
Answer:
(B) 1.66
Operating leverage = 4,00,000/3,00,000= 1.33
Financial leverage = 3,00,000/2,40,000 = 1.25
Combined leverage = 1.33 × 1.25 = 1.66

Question 94.
Operating leverage = 2
Combined leverage = 3.5
EBIT = ₹ 2,80,000
Interest = ₹ 40,000
Tax rate = 50%.
Capital structure of the company consists of equity shares and preference shares.
Amount of Preference Dividend = ?
(A) ₹ 39,967
(B) ₹ 39,970
(C) ₹ 39,000
(D) ₹ 40,000
Answer:
(D) ₹ 40,000
Leverages – Financial Management MCQ 30

Question 95.
EBIT = ₹ 4,00,000 Fixed cost = ₹ 6,00,000 Interest = ₹ 80,000 Combined leverage = ?
(A) Sufficient data is not given
(B) 3.12
(C) 3.215
(D) 3.125
Answer:
(D) 3.125
Contribution = 4,00,000 + 6,00,000 = 10,00,000
EBT = 4,00,000 – 80,000 = 3,20,000
Leverages – Financial Management MCQ 31

Question 96.
EBIT = ₹ 40,000 Variable cost = ₹ 2,40,000 Sales = ₹ 4,00,000 Operating leverage = ?
(A) 3.5
(B) 4.125
(C) 4.0
(D) 3.125
Answer:
(C) 4.0
Leverages – Financial Management MCQ 33

Question 97.
Contribution = ₹ 7,00,000
Fixed cost = ₹ 2,00,000
Interest = ₹ 3,00,000
Financial leverage = ?
(A) 2.0
(B) 1.5
(C) 2.5
(D) 1.0
Answer:
(C) 2.5

Question 98.
Contribution of a firm is ₹ 4,000.
Situation A — ₹ 1,000
Situation B — ₹ 2,000
Situation C — ₹ 3,000
Compute the operating leverage for the three situations.
(A) 1.33; 1.18; 1.82
(B) 1.33; 2.36; 2.86
(C) 2.86; 2.00; 3.64
(D) 1.33; 2.00; 4.00
Answer:
(D) 1.33; 2.00; 4.00
Leverages – Financial Management MCQ 64

Question 99.
EBIT of a firm is ₹ 3,000.
Leverages – Financial Management MCQ 13
Compute the financial leverage for the three plans respectively.
(A) 1.33; 1.11; 1.43
(B) 1.25; 1.18; 1.43
(C) 1.66; 1.48; 1.90
(D) 1.25; 1.11; 1.43
Answer:
(D) 1.25; 1.11; 1.43
Leverages – Financial Management MCQ 64

Question 100.
Calculate Financial Leverage & EPS assuming 20% before tax rate of return on assets. Other data:
Leverages – Financial Management MCQ 14
Applicable tax rate firm is 50%.
Select the correct answer from the options given below:
Leverages – Financial Management MCQ 15
Answer:
(C)
Leverages – Financial Management MCQ 34

Question 101.
If the combined leverage and operating leverage figures of a company are 2.5 and 1.25 respectively, find the financial leverage and P / V ratio, given that the equity dividend per share is ₹ 2, interest payable per year is ₹ 1 lakh, total fixed cost ₹ 0.5 lakh and sales ₹ 10 lakhs.
(A) 3.125; 25%
(B) 2.00; 40%
(C) 2.00; 25%
(D) 3.00; 40%
Answer:
(C) 2.00; 25%
Operating Leverage × Financial Leverage = Combined Leverage
1.25 × Financial Leverage = 2.5
Financial Leverage = 2

Leverages – Financial Management MCQ 35

Question 102.
A firm has sales of ₹ 75,00,000, variable cost of ₹ 42,00,000 and fixed cost of ₹ 6,00,000. It has a debt of ₹ 45,00,000 at 9% and equity of ₹ 55,00,000. What is the firm’s ROI?
(A) 72%
(B) 27%
(C) 32%
(D) 23%
Answer:
(B) 27%

Question 103.
A firm has sales of ₹ 75,00,000, variable cost of ₹ 42,00,000 and fixed cost of ₹ 6,00,000. It has a debt of ₹ 45,00,000 at 9% and equity of ₹ 55,00,000. Does it have favourable financial leverage?
(A) ROI is less than interest on loan funds and hence it has no favourable financial leverage.
(B) ROI is equal to interest on loan funds and hence it has favourable financial leverage.
(C) ROI is greater than interest on loan funds and hence it has favourable financial leverage.
(D) ROI is greater than interest on loan funds and hence it has unfavourable financial leverage.
Answer:
(C) ROI is greater than interest on loan funds and hence it has favourable financial leverage.

Question 104.
A firm has sales of ₹ 75,00,000, variable cost of ₹ 42,00,000 and fixed cost of ₹ 6,00,000. It has a debt of ₹ 45,00,000 at 9% and equity of ₹ 55,00,000.
If the firm belongs to an industry whose asset turnover is 3, does it have high or low asset leverage?
(A) Industry asset turnover ratio is 3 whereas firm has asset turnover ratio 4 which is high as compared to industry.
(B) Industry asset turnover ratio is 3 whereas firm has asset turnover ratio 1.75 which is low as compared to industry.
(C) Industry asset turnover ratio is 3 whereas firm has asset turnover ratio 0.75 which is low as compared to industry.
(D) None of the above
Answer:
(C) Industry asset turnover ratio is 3 whereas firm has asset turnover ratio 0.75 which is low as compared to industry.

Question 105.
A firm has sales of ₹ 75,00,000, variable cost of ₹ 42,00,000 and fixed cost of ₹ 6,00,000. It has a debt of ₹ 45,00,000 at 9% and equity of ₹ 55,00,000. What are the operating, financial and combined leverages of the firm?
(A) 1.22, 1.44, 1.18
(B) 1.22, 1.12, 1.44
(C) 1.22, 1.18, 1.44
(D) 1.20, 1.18, 1.44
Answer:
(C) 1.22, 1.18, 1.44

Question 106.
A firm has sales of ₹ 75,00,000, variable cost of ₹ 42,00,000 and fixed cost of ₹ 6,00,000. It has a debt of ₹ 45,00,000 at 9% and equity of ₹ 55,00,000. At what level of sales the EBT of the firm will be equal to zero?
(A) ₹ 22,84,091
(B) ₹ 10,05,000
(C) ₹ 22,48,910
(D) ₹ 10,50,000
Answer:
(A) ₹ 22,84,091

Question 107.
Following data is available for A Ltd.
Financial Leverage — 3:1
Interest — 2,000
Operating Leverage — 4:1
Variable cost (% to sales) — 66.67%
Income Tax Rate — 45%
Contribution = ?
(A) ₹ 6,000
(B) ₹ 12,000
(C) ₹ 36,000
(D) ₹ 18,000
Answer:
(B) ₹ 12,000

Question 108.
Following data is available for B Ltd.
Financial Leverage — 4:1
Interest — 3,000
Operating Leverage — 5:1
Variable cost (% to sales) — 75%
Income Tax Rate — 45%
What are the sales of B Ltd.?
(A) ₹ 12,000
(B) ₹ 20,000
(C) ₹ 60,000
(D) ₹ 80,000
Answer:
(D) ₹ 80,000

Question 109.
Following data is available for C Ltd.
Financial Leverage — 2:1
Interest — ₹ 10,000
Operating Leverage — 3:1
Variable cost (% to sales) — 50%
Income Tax Rate — 45%
What is the sales and profit after tax (PAT) of C Ltd?
(A) ₹ 1,20,000; ₹ 5,500
(B) ₹ 1,00,000; ₹ 5,000
(C) ₹ 1,50,000;₹ 6,500
(D) ₹ 1,50,000;₹ 6,000
Answer:
(A) ₹ 1,20,000; ₹ 5,500

Question 110.
A Financial Analyst has gathered following data for PQR Ltd.
Change in revenue = 27%
Change in operating profit after tax = 20%
Change in operating income = 25%
What should be the operating leverage of PQR Ltd.?
(A) 0.74
(B) 0.93
(C) Above 1.00
(D) 1.93
Answer:
(B) 0.93

Question 111.
A Financial Analyst has gathered following data for TUV Ltd. & WXY Ltd.:
Leverages – Financial Management MCQ 16
Using the concept of operating leverage concept and beta state which company has more risk as compared to market?
(A) TUV Ltd. is more risky
(B) WXY Ltd. is more risky
(C) TUV Ltd. & WXY Ltd. both are more risky as compared to market as there operating leverages and betas are more than market. However, WXY Ltd. is more risky than market as well as TUV Ltd.
(D) TUV Ltd. & WXY Ltd. both are less risky as compared to market as there operating leverages and betas are more than market.
Answer:
(C) TUV Ltd. & WXY Ltd. both are more risky as compared to market as there operating leverages and betas are more than market. However, WXY Ltd. is more risky than market as well as TUV Ltd.

Question 112.
Details of R Ltd. are given below:
Leverages – Financial Management MCQ 17
Leverages – Financial Management MCQ 18
Operating & Combined Leverage are 1.4 & 2.8 respectively. Income Tax Rate is 30%. Calculate EPS.
(A) 1.50
(B) 1.55
(C) 1.05
(D) 1.00
Answer:
(C) 1.05
Combined Leverage = Operating Leverage × Financial Leverage
2.8 = 1.4 × Financial Leverage
Financial Leverage = 2
Leverages – Financial Management MCQ 36
2x – 5.1= x
x = 5.1
EBIT = x = 5.1
EBT = 5.1 – 2.55 = 2.55
Leverages – Financial Management MCQ 37
Contribution – Fixed Cost EBIT
Contribution – 2.04 = 5.1
Contribution = 7.14
Leverages – Financial Management MCQ 38
Leverages – Financial Management MCQ 39

Question 113.
Take the data of above question and calculate P/V Ratio.
(A) 23.8%
(B) 22.8%
(C) 20.8%
(D) 24.8%
Answer:
(A) 23.8%
Combined Leverage = Operating Leverage × Financial Leverage
2.8 = 1.4 × Financial Leverage
Financial Leverage = 2
Leverages – Financial Management MCQ 36
2x – 5.1= x
x = 5.1
EBIT = x = 5.1
EBT = 5.1 – 2.55 = 2.55
Leverages – Financial Management MCQ 37
Contribution – Fixed Cost EBIT
Contribution – 2.04 = 5.1
Contribution = 7.14
Leverages – Financial Management MCQ 38
Leverages – Financial Management MCQ 39

Question 114.
Take the data of above question and tell at what level of sales the earning before tax (EBT) of the company will be equal to zero?
(A) ₹ 19.00 lakh
(B) ₹ 19.20 lakh
(C) ₹ 19.29 lakh
(D) ₹ 19.92 lakh
From the following information answer next 5 questions:
The capital structure of JCPL Ltd. is as follows:
Leverages – Financial Management MCQ 19
Answer:
(C) ₹ 19.29 lakh
Combined Leverage = Operating Leverage × Financial Leverage
2.8 = 1.4 × Financial Leverage
Financial Leverage = 2
Leverages – Financial Management MCQ 36
2x – 5.1= x
x = 5.1
EBIT = x = 5.1
EBT = 5.1 – 2.55 = 2.55
Leverages – Financial Management MCQ 37
Contribution – Fixed Cost EBIT
Contribution – 2.04 = 5.1
Contribution = 7.14
Leverages – Financial Management MCQ 38
Leverages – Financial Management MCQ 39

Additional Information:
Profit after tax (tax rate 30%) — ₹ 1,82,000
Operating expenses (including depreciation ₹ 90,000) being 1.50 times of EBIT.
Equity share dividend paid — 15%.
Market price per equity share — ₹ 20.

Question 115.
Calculate operating & financial leverage.
(A) 1.30; 1.59
(B) 1.59; 1.30
(C) 1.39; 1.50
(D) 1.50; 1.39
Answer:
(A) 1.30; 1.59
Leverages – Financial Management MCQ 40
If there are preference shares in capital structure then following formula has to be used to calculate the financial leverage.
Leverages – Financial Management MCQ 41
Leverages – Financial Management MCQ 42
EBIT = EBT + Interest
EBIT = 2,60,000 + 40,000
EBIT = 3,00,000
Operating expenses EBIT × 1.5
=3,00,000 × 1.5
= 4,50,000
Operating expenses = Variable Cost + Fixed Cost
4,50,000 = Variable Cost + 90,000 (Depreciation)
Variable Cost = 3,60,000

Question 116.
Cover for the preference and equity share of dividends = ?
(A) 1.10; 3.65
(B) 1.65; 1.10
(C) 1.85; 2.10
(D) 3.64; 1.10
Answer:
(D) 3.64; 1.10
Leverages – Financial Management MCQ 40
If there are preference shares in capital structure then following formula has to be used to calculate the financial leverage.
Leverages – Financial Management MCQ 41
Leverages – Financial Management MCQ 42
EBIT = EBT + Interest
EBIT = 2,60,000 + 40,000
EBIT = 3,00,000
Operating expenses EBIT × 1.5
=3,00,000 × 1.5
= 4,50,000
Operating expenses = Variable Cost + Fixed Cost
4,50,000 = Variable Cost + 90,000 (Depreciation)
Variable Cost = 3,60,000

Question 117.
Earnings Per Share (EPS) = ?
(A) 1.56
(B) 1.65
(C) 1.91
(D) 1.19
Answer:
(B) 1.65
Leverages – Financial Management MCQ 40
If there are preference shares in capital structure then following formula has to be used to calculate the financial leverage.
Leverages – Financial Management MCQ 41
Leverages – Financial Management MCQ 42
EBIT = EBT + Interest
EBIT = 2,60,000 + 40,000
EBIT = 3,00,000
Operating expenses EBIT × 1.5
=3,00,000 × 1.5
= 4,50,000
Operating expenses = Variable Cost + Fixed Cost
4,50,000 = Variable Cost + 90,000 (Depreciation)
Variable Cost = 3,60,000

Question 118.
Earning Yield Ratio = ?
(A) 8.00%
(B) 8.52%
(C) 8.25%
(D) 8.75%
Answer:
(C) 8.25%
Leverages – Financial Management MCQ 40
If there are preference shares in capital structure then following formula has to be used to calculate the financial leverage.
Leverages – Financial Management MCQ 41
Leverages – Financial Management MCQ 42
EBIT = EBT + Interest
EBIT = 2,60,000 + 40,000
EBIT = 3,00,000
Operating expenses EBIT × 1.5
=3,00,000 × 1.5
= 4,50,000
Operating expenses = Variable Cost + Fixed Cost
4,50,000 = Variable Cost + 90,000 (Depreciation)
Variable Cost = 3,60,000

Question 119.
Price earnings ratio = ?
(A) 12.00 times
(B) 12.12 times
(C) 12.21 times
(D) 12.19 times
Answer:
(B) 12.12 times
Leverages – Financial Management MCQ 40
If there are preference shares in capital structure then following formula has to be used to calculate the financial leverage.
Leverages – Financial Management MCQ 41
Leverages – Financial Management MCQ 42
EBIT = EBT + Interest
EBIT = 2,60,000 + 40,000
EBIT = 3,00,000
Operating expenses EBIT × 1.5
=3,00,000 × 1.5
= 4,50,000
Operating expenses = Variable Cost + Fixed Cost
4,50,000 = Variable Cost + 90,000 (Depreciation)
Variable Cost = 3,60,000

Question 120.
You are Finance Manager Big Pen Ltd. The degree of operating leverage of your company is 5.0. The degree of financial leverage of your company is 3.0. Your Managing Director has found that the degree of operating leverage and the degree of financial leverage of your nearest competitor Small Pen Ltd. are 6.0 and 4.0 respectively. In his opinion, the Small Pen Ltd. is better than that Big Pen Ltd. because of higher value of degree of leverages. Which of the following statement is correct in relation to facts given above?
(A) High operating leverage shows higher burden of fixed cost consequently higher business risk. As Small Pen Ltd. has higher operating leverage hence it has high business risk as compared to Big Pen Ltd.

(B) High financial leverage shows higher burden of interest cost consequently higher financial risk. As Small Pen Ltd. has higher financial leverage hence it has high financial risk as compared to Big Pen Ltd.

(C) High combined leverage shows combined effect of higher burden of fixed and interest cost consequently higher business & financial risk. As Small Pen Ltd. has higher combined leverage hence it has high business risk & financial risk

(D) All of the above
From the following information answer next 3 questions:

A simplified income statement of Abbiash Ltd. is given below.
Leverages – Financial Management MCQ 20
Answer:
(D)

Question 121.
Calculate percentage increase in EBIT if sales increases by 10%.
(A) 13.61%
(B) 13.16%
(C) 13.25%
(D) 13.52%
Answer:
(A) 13.61%
(1) Operating leverage is 1.36 1, this means that 10% change in sales will cause 13.61% change in EBIT.
(2) Financial leverage is 2.122, this means that 10% change in EBIT will cause 21.22% change in EBT.
(3) Combined leverage is 2.888, this means that 10% change in sales will cause 28.889 change in PAT/EPS.

Question 122.
Calculate percentage increase in EBT if EBIT increases by 10%.
(A) 21.21%
(B) 21.00%
(C) 21.22%
(D) 22.11%
Answer:
(C) 21.22%
(1) Operating leverage is 1.36 1, this means that 10% change in sales will cause 13.61% change in EBIT.
(2) Financial leverage is 2.122, this means that 10% change in EBIT will cause 21.22% change in EBT.
(3) Combined leverage is 2.888, this means that 10% change in sales will cause 28.889 change in PAT/EPS.

Question 123.
Calculate percentage increase in EPS if sales increases by 10%.
(A) 28.00%
(B) 28.88%
(C) 28.44%
(D) 28.33%
From the following information answer next 5 questions:
DIGI Computers Ltd. is a manufacturer of computer systems. It has total sales of ₹ 1 Crore. Its variable and fixed costs amount to ₹ 60 lakhs and ₹ 10 lakhs respectively. It has borrowed ₹ 60 lakhs @ 10% per annum and has an equity capital of ₹ 75 lakhs.
Answer:
(B) 28.88%
(1) Operating leverage is 1.36 1, this means that 10% change in sales will cause 13.61%
change in EBIT.
(2) Financial leverage is 2.122, this means that 10% change in EBIT will cause 21.22% change in EBT.
(3) Combined leverage is 2.888, this means that 10% change in sales will cause 28.889 change in PAT/EPS.

Question 124.
What is company’s return on investment (ROI)?
(A) 20.00%
(B) 22.00%
(C) 22.22%
(D) 20.22%
Answer:
(C) 22.22%
Leverages – Financial Management MCQ 43
Leverages – Financial Management MCQ 44
Return on Investment (ROI) is 22.22% whereas interest on loan funds is 10 which is less than ROI and hence company has favourable financial leverage. calculation of asset turnover ratio and comparison with industry:
Leverages – Financial Management MCQ 45
Industry asset turnover ratio is 1 whereas DIGI Ltd. has asset turnover ratio 0.74 which is low as compared to industry. This means that either DIGI Ltd. has low sales as compared to industry or its assets are high and not effectively utilized towards sales.
Computation of leverages:
Leverages – Financial Management MCQ 46

Question 125.
Does it have favourable financial leverage?
(A) ROI is less than interest on loan funds and hence it has no favourable financial leverage.
(B) ROI is equal to interest on loan funds and hence it has favourable financial leverage.
(C) ROI is greater than interest on loan funds and hence it has favourable financial leverage.
(D) ROI is greater than interest on loan funds and hence it has unfavourable financial leverage.
Answer:
(C) ROI is greater than interest on loan funds and hence it has favourable financial leverage.
Leverages – Financial Management MCQ 43
Leverages – Financial Management MCQ 44
Return on Investment (ROI) is 22.22% whereas interest on loan funds is 10 which is less than ROI and hence company has favourable financial leverage. calculation of asset turnover ratio and comparison with industry:
Leverages – Financial Management MCQ 45
Industry asset turnover ratio is 1 whereas DIGI Ltd. has asset turnover ratio 0.74 which is low as compared to industry. This means that either DIGI Ltd. has low sales as compared to industry or its assets are high and not effectively utilized towards sales.
Computation of leverages:
Leverages – Financial Management MCQ 46

Question 126.
If the firm belongs to an industry whose asset turnover is 1, does it have high or low asset leverage?
(A) Industry asset turnover ratio is 1 whereas firm has asset turnover ratio 2.74 which is high as compared to industry.
(B) Industry asset turnover ratio is 1 whereas firm has asset turnover ratio 1.75 which is low as compared to industry.
(C) Industry asset turnover ratio is 1 whereas firm has asset turnover ratio 0.74 which is low as compared to industry.
(D) None of the above
Answer:
(C) Industry asset turnover ratio is 1 whereas firm has asset turnover ratio 0.74 which is low as compared to industry.

Question 127.
What are the operating, financial and combined leverages of the firm?
(A) 1.33; 1.25; 1.67
(B) 1.33; 1.67; 1.25
(C) 1.25; 1.33; 1.67
(D) None of the above
Answer:
(A) 1.33; 1.25; 1.67
Leverages – Financial Management MCQ 43
Leverages – Financial Management MCQ 44
Return on Investment (ROI) is 22.22% whereas interest on loan funds is 10 which is less than ROI and hence company has favourable financial leverage. calculation of asset turnover ratio and comparison with industry:
Leverages – Financial Management MCQ 45
Industry asset turnover ratio is 1 whereas DIGI Ltd. has asset turnover ratio 0.74 which is low as compared to industry. This means that either DIGI Ltd. has low sales as compared to industry or its assets are high and not effectively utilized towards sales.
Computation of leverages:
Leverages – Financial Management MCQ 46

Question 128.
If sales drop to ₹ 50 lakhs, what will be the new EBIT?
(A) ₹ 20,00,000
(B) ₹ 15,00,000
(C) ₹ 50,00,000
(D) ₹ 10,00,000
Answer:
(D) ₹ 10,00,000
Leverages – Financial Management MCQ 43
Leverages – Financial Management MCQ 44
Return on Investment (ROI) is 22.22% whereas interest on loan funds is 10 which is less than ROI and hence company has favourable financial leverage. calculation of asset turnover ratio and comparison with industry:
Leverages – Financial Management MCQ 45
Industry asset turnover ratio is 1 whereas DIGI Ltd. has asset turnover ratio 0.74 which is low as compared to industry. This means that either DIGI Ltd. has low sales as compared to industry or its assets are high and not effectively utilized towards sales.
Computation of leverages:
Leverages – Financial Management MCQ 46

Question 129.
From the following data of Abhishek Ltd., compute the operating leverage, financial leverage, combined leverage.
EBIT — 10 lakh
Profit before tax (PBT) — 4 lakh
Fixed cost — 6 lakh
(A) 1.6; 2.5; 4.0
(B) 2.5; 1.6; 4.0
(C) 4.0; 2.5; 1.6
(D) 4.0; 1.5; 2.5
Answer:
(A)
Leverages – Financial Management MCQ 47

Question 130.
From the following data of Tanishka Ltd., compute the percentage change in earnings per share (EPS), if sales are expected to increase by 5%:
EBIT — 16.00 lakh
Profit before tax (PBT) — 6.40 lakh
Fixed cost — 9.60 lakh
(A) 5%
(B) 10%
(C) 4%
(D) 20%
Answer:
(D) 20%
From the following data of Tanishka Ltd., compute the percentage change in earnings per share (EPS), if sales are expected to increase by 5%. Thus, 5% change in sales will cause 20% change in PAT/EPS.

Question 131.
Following data is available for Alpha Ltd.
Financial leverage — 2:1
Operating leverage — 3:1
Interest charges — 20 lakh
Corporate tax rate — 40%
Variable (% of sales) — 60%
Sales ?
(A) 1,00,00,000
(B) 1,20,00,000
(C) 2,00,00,000
(D) 3,00,00,000
Answer:
(D) 3,00,00,000

Question 132.
Following data is available for X Ltd.
Variable cost (% of sales) — 70%
Interest expense — ₹ 20,000
DOL — 5:1
DFL — 3:1
Corporate tax rate — 30%
EBIT = ?
(A) ₹ 30,000
(B) ₹ 20,000
(C) ₹ 60,000
(D) ₹ 15,000
Answer:
(A) ₹ 30,000
Leverages – Financial Management MCQ 48

Question 133.
Following data is available for Y Ltd.
Variable cost (% of sales) — 75%
Interest expense — ₹ 30,000
DOL — 6:1
DFL — 4:1
Corporate tax rate 30%
Contribution = ?
(A) ₹ 9,60,000
(B) ₹ 2,40,000
(C) ₹ 3,00,000
(D) ₹ 7,80,000
Answer:
(B) ₹ 2,40,000
Leverages – Financial Management MCQ 49

Question 134.
Following data is available for Z Ltd.
Variable cost (96 of sales) — 50%
Interest expense — ₹ 1,00,000
DOL — 2:1
DFL — 2:1
Corporate tax rate — 30%
Sales = ?
(A) ₹ 4,00,000
(B) ₹ 6,00,000
(C) ₹ 8,00,000
(D) ₹ 9,00,000
From the following information answer next 3 questions:
Leverages – Financial Management MCQ 21
Answer:
(C) ₹ 8,00,000
Leverages – Financial Management MCQ 50

Question 135.
What percentage will EBIT increase, if there is a 1096 increase in sales?
(A) 32.096
(B) 31.1496
(C) 33.71%
(D) 32.5%
Answer:
(D) 32.5%

Question 136.
What percentage will taxable income increase, if EBIT increases by 6%?
(A) 6.86%
(B) 6.67%
(C) 6.33%
(D) 6.22%
Answer:
(A) 6.86%

Question 137.
What percentage will taxable income increase, if the sales increase by 6%
(A) 22.29%
(B) 22.92%
(C) 22.78%
(D) 22.87%
From the following information answer next 3 questions.
Following information relating to the operations and capital structure of Swadeshi Ltd. is available:
Installed capacity: 2,000 units
Production & sales: 50% of installed capacity
Selling price per unit: ₹ 20
Variable cost per unit: ₹ 10.
Fixed costs:
Situation-1: ₹ 4,000
Situation-2: ₹ 5,000
Capital structure:
Leverages – Financial Management MCQ 22
Answer:
(A) 22.29%

Question 138.
What is the Operating Leverage?
Leverages – Financial Management MCQ 23
Answer:
(C)
Actual production and sales = 2,000 × 50% = 1,000 units
Sales – Variable Cost Contribution; 20 – 10 = 10
Leverages – Financial Management MCQ 51

Question 139.
What is the Financial Leverage?
Leverages – Financial Management MCQ 24
Answer:
(C)
Actual production and sales = 2,000 × 50% = 1,000 units
Sales – Variable Cost Contribution; 20 – 10 = 10
Leverages – Financial Management MCQ 51

Question 140.
What is the Combined Leverage?
Leverages – Financial Management MCQ 25
Answer:
(C)
Actual production and sales = 2,000 × 50% = 1,000 units
Sales – Variable Cost Contribution; 20 – 10 = 10
Leverages – Financial Management MCQ 51

Question 141.
Total assets of Honey Well Ltd. are ₹ 6,00,000. Total assets turnover ratio is 2.5 times. The fixed operating costs are ₹ 2,00,000 and variable operating cost ratio is 40%. Income tax rate is 30%. Calculate operating, financial and combined leverage?
(A) 1.2857; 1.0355; 1.3314
(B) 1.0355; 1.2857; 1.3314
(C) 1.3314; 1.0355; 1.2857
(D) 1.2857; 1.3314; 1.2857
Answer:
(A) 1.2857; 1.0355; 1.3314
Leverages – Financial Management MCQ 52
Leverages – Financial Management MCQ 53

Question 142.
Total assets of Q Ltd. are ₹ 6,00,000. Total assets turnover ratio is 2.5 times. The fixed operating costs are ₹ 2,00,000 and variable operating cost ratio is 40%. Income tax rate is 30%. No. of equity shares are 18,000. Determine the likely level of EBIT if EPS is ₹ 6.
(A) ₹ 1,54,286
(B) ₹ 1,78,286
(C) ₹ 1,54,682
(D) ₹ 1,78,862
Answer:
(B) ₹ 1,78,286
Leverages – Financial Management MCQ 54

Question 143.
Which of the following company has greater business risk? (₹ in lakhs)
Leverages – Financial Management MCQ 65
(A) A Ltd.
(B) B Ltd.
(C) C Ltd.
(D) D Ltd.
Answer:
(D) D Ltd.
D Ltd. has high operating leverage and hence its business risk is higher as compared to other companies.

Question 144.
ABC Ltd. has an average selling price of ₹ 10 per unit. Its variable unit costs are ₹ 7 and fixed costs amount to ₹ 1,70,000. It finances all its assets by equity funds. It pays 30% tax on its income. PQR Ltd. is identical to ABC Ltd. except in respect of the pattern of financing. The latter finances its assets 50% by equity and 50% by debt, the interest on which amounts to ₹ 20,000.
Which of the following statement is correct?
(A) Both companies have similar business risk.
(B) PQR Ltd. has high financial risk as compared to ABC Ltd.
(C) PQR Ltd. has high business risk & financial risk as compared to ABC Ltd.
(D) All of the above
Answer:
(D) All of the above
(1) High operating leverage shows higher burden of fixed cost consequently higher business risk. As both companies has similar operating leverage hence both has same business risk.
(2) High financial leverage shows higher burden of interest cost consequently higher financial risk. As POR Ltd. has higher financial leverage hence it has high financial risk as compared to ABC Ltd.
(3) High combined leverage shows combined effect of higher burden of fixed and interest cost consequently higher business & financial risk. As POR Ltd. has higher combined leverage hence it has high business risk & firancial risk as compared to ABC Ltd.

Question 145.
Bling Ltd. supplies following data:
Operating leverage 2.5; financial leverage 3; EPS ₹ 30; market price per share ₹ 225; and capital 20,000 shares. It is proposed to raise a loan of ₹ 50,00,000 @18% for expansion. After expansion, sales will increase by 25% and fixed cost by ₹ 3,00,000.
Work out the market price per share after expansion, assuming tax rate @ 50%.
(A) 25.56
(B) 52.56
(C) 56.25
(D) 65.52
Answer:
(C) 56.25
Leverages – Financial Management MCQ 55
x = Profit available for equity shareholder 6,00,000
Tax rate is 509õ hence profit before tax will be Rs. 12,00,000.
Leverages – Financial Management MCQ 56
Leverages – Financial Management MCQ 57

Question 146.
S Ltd. produces products with a selling price per unit of ₹ 100. Fixed cost is ₹ 2,00,000. 5,000 units are produced and sold. Annual profit is ₹ 50,000. Company’s all equity-financed assets are ₹ 5,00,000. The company proposes to change its production process, adding ₹ 4,00,000 to investment by debt financing and ₹ 50,000 to fixed operational costs. The consequences of such a proposal are:
(i) Reduction in variable cost per unit by — ₹ 10
(ii) Increase in output by — 2,000 units
(iii) Reduction in selling price per unit to — ₹ 95
Assume cost of capital 10%. Measure the degree of operating leverage for present and proposed situation.
(A) 4.85; 3.00
(B) 2.58; 5.00
(C) 5.00; 2.85
(D) 2.85; 5.00
Answer:
(C) 5.00; 2.85
Leverages – Financial Management MCQ 58

Question 147.
During year 2018-19, Gulf Oil India made sales of worth ₹ 257 Crores, which was down by 7.4% compared to previous year’s sales. While the company could reduce its overheads, its variable input cost went-up significantly. As a result, variable cost-to-sales ratio in 2018-19 stood at 55.8% as opposed to 48.5% in the previous year. The financial highlights for the year 2018 – 19 are as given under:
(₹ in Crores)
Sales — 257.00
Overheads — 103.50
Depreciation — 2.70
Interest — 6.50
Earnings before tax — 0.70
Company is expecting a decline in sales by 1% in the next year. If the cost structure remains the same, what will be the expected EBIT?
(A) ₹ 6.06 Crore
(B) ₹ 5.60 Crore rise by 1%.
(C) ₹ 60.06 Crore
(D) ₹ 5.06 Crore
Answer:
(A) ₹ 6.06 Crore
Leverages – Financial Management MCQ 59
Operating leverage is 15.78; thus, if company is expecting a decline in sales by 1% in the next year, then EBIT will decline by 15.78%.
Expected EBIT = 7.20 – 1.14 (15.78% of 7.20) = 6.06 Crores

Question 148.
A firm has a DOL of 3.5 at Q units. What does this tell us about the firm?
(A) If sales rise by 3.5% at the firm, then EBIT will rise by 1%.
(B) If EBIT rises by 3.5% at the firm, then EPS will rise by 1%.
(C) If EBIT rises by 1% at the firm, then EPS will rise by 3.5%.
(D) If sales rise by 1% at the firm, then EBIT will rise by 3.5%
Answer:
(D) If sales rise by 1% at the firm, then EBIT will rise by 3.5%.

Question 149.
A firm has a DFL of 3.5. What does this tell us about the firm?
(A) If sales rise by 3.5%, then EBIT will rise by 1%.
(B) If EBIT rises by 3.5%, then EPS will rise by 1%.
(C) If EBIT rises by 1%, then EPS will rise by 3.5%.
(D) If sales rise by 1% at the firm, then EBIT will rise by 3.5%.
Answer:
(C) If EBIT rises by 1%, then EPS will rise by 3.5%.

Question 150.
Calculate the degree of financial leverage (DFL) for a firm when its EBIT is 20,00,000. The firm has 30.00,000 in debt that costs 10% annually. The firm also has a 9%, ₹ 10,00,000 preferred stock issue outstanding. The firm pays 40% in taxes.
(A) 0.78
(B) 0.80
(C) 1.24
(D) 1.29
Answer:
(A) 0.78
Leverages – Financial Management MCQ 60