Leverage Ratios Level 1 Quiz Financial Analysis Quiz On Aug 7, 2024 Share /25 12345678910111213141516171819202122232425 Leverage Ratios Level 1 25 questions in 10 minutes Pass Score 70% 1 / 25 Leverage ratios help in understanding a company's capital structure. True False Leverage ratios provide insight into how a company’s capital structure is composed of debt and equity 2 / 25 Operating leverage affects a company's break-even point. False True Operating leverage affects the break-even point by influencing how changes in sales volume impact operating income 3 / 25 Financial leverage involves the use of debt to increase the potential return on equity. True False Financial leverage uses debt to amplify the potential return on equity 4 / 25 Leverage ratios are used to evaluate a company's ability to meet its short-term obligations. False True Leverage ratios are more concerned with long-term debt levels and financial stability rather than short-term obligations 5 / 25 An increase in financial leverage will always result in higher returns for equity holders. False True While financial leverage can increase returns, it also increases risk; higher leverage does not guarantee higher returns 6 / 25 The degree of combined leverage combines the effects of operating and financial leverage. True False It reflects the total impact of both operating and financial leverage on a company’s earnings 7 / 25 A higher degree of operating leverage indicates that a company has higher fixed costs relative to variable costs. True False Operating leverage measures how sensitive a company's operating income is to changes in sales volume 8 / 25 The degree of combined leverage is the sum of the degree of operating leverage and the degree of financial leverage. True False The degree of combined leverage is not simply the sum of operating and financial leverage; it represents the multiplicative effect of both. 9 / 25 The degree of operating leverage is calculated by dividing the percentage change in EBIT by the percentage change in sales. True False The degree of operating leverage measures the sensitivity of EBIT to changes in sales volume 10 / 25 A higher debt-to-equity ratio indicates lower financial risk. True False A higher debt-to-equity ratio indicates higher financial risk as it shows a greater proportion of debt relative to equity 11 / 25 Leverage ratios can be used to assess the impact of debt on earnings volatility. True False Leverage ratios help assess how debt influences the volatility of a company's earnings 12 / 25 Leverage ratios are not useful for assessing a company’s risk profile. False True Leverage ratios are crucial in evaluating a company’s risk profile by highlighting the level of debt relative to equity 13 / 25 Higher financial leverage increases the fixed financial costs of a company. True False Financial leverage involves more debt, leading to higher fixed financial costs such as interest payments 14 / 25 The debt-to-equity ratio is a type of leverage ratio. False True The debt-to-equity ratio measures the relative proportion of shareholders' equity and debt used to finance a company's assets 15 / 25 Leverage ratios measure the extent of a company's debt relative to its equity. True False Leverage ratios, such as the debt-to-equity ratio, assess how much debt a company is using to finance its assets relative to equity 16 / 25 Combined leverage measures the relationship between a firm's operating and financial leverage. True False Combined leverage evaluates the impact of both operating and financial leverage on a company's earnings 17 / 25 A lower degree of operating leverage means less sensitivity to changes in sales. True False Lower operating leverage implies that a company’s earnings are less sensitive to changes in sales volume 18 / 25 The degree of financial leverage can be calculated using the formula: (EBIT - Interest) / EBIT. False True The degree of financial leverage is calculated as (EBIT / (EBIT - Interest)), not the other way around 19 / 25 The degree of financial leverage is highest when a company has no debt. False True The degree of financial leverage increases with the amount of debt; it is lowest when there is no debt 20 / 25 Higher leverage ratios generally increase the risk and return of a company. True False Increased leverage can amplify both potential returns and risks 21 / 25 The operating leverage effect diminishes as sales increase. False True As sales grow, the relative impact of fixed costs on operating leverage tends to diminish 22 / 25 Combined leverage analysis is useful for understanding the total risk of a company’s operations and financing. True False It provides a comprehensive view of both operational and financial risks 23 / 25 Financial leverage is concerned with the use of assets to increase a company’s operational income. False True Financial leverage specifically refers to using debt to amplify returns, not directly the use of assets for operational income 24 / 25 Leverage ratios help in assessing the potential impact of debt on a company's equity returns. True False Leverage ratios are instrumental in evaluating how debt impacts the returns on equity 25 / 25 Leverage ratios are used to assess a company’s liquidity. True False Leverage ratios are used to assess a company’s debt levels and financial risk, not liquidity. 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