MCQ On Leverage Notes

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MCQ ON Leverage - notes
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MCQs ON LEVERAGE
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.
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
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
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
5. Operating leverage indicates the tendency of operating profits (EBIT) to vary

disproportionately with –
(A) Profit
(B) Fixed cost

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(C) Sales
(D) EPS
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).
(B) Combined Leverage
(C) Working Capital Leverage
(D) Financial Leverage
7. There is no operating leverage if there is no _______
(A) Profit
(B) Sales
(C) Fixed cost
(D) EPS
8. EBIT is usually the same thing as:
(A) Funds provided by operations
(B) Earnings before taxes
(C) Net income
(D) Operating profit
9. Which of the following is correct formula to calculate Operating Leverage?
(A) Operating Leverage = Contribution/EBIT
(B) Operating Leverage = Contribution/EBIT
(C) Operating Leverage = Contribution/EBIT
(D) Operating Leverage = Contribution/EBIT
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

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(C) Stay the same
(D) Still be indeterminate until interest and preferred dividends paid are known
(A)
(B)
(C)
(D)
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
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.
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
15. If the fixed costs are high, the operating leverage will also be –

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(A) Low
(B) High
(C) Zero
(D) Negative
16. Measure of business risk is –
(A) Operating leverage
(B) Financial leverage
(C) Combines leverage
(D) Working capital leverage
17. The presence of fixed costs in the total cost structure of a firm results into –
(C) Super Leverage
(D) Progressive leverage
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.
19. Match List-I with List-II and select the correct answer using the codes given
below the lists:
List-I List-II
P. Factoring 1. Sales
Q. Operating leverage 2. Fixed interest cost
R. Debtors turnover ratio 3. Working capital

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S. Financial leverage 4. Break-even point
5. Fixed cost
Select the correct answer from the options given below:
P Q R
(A) 4 5 1
(B) 3 5 2
(C) 3 5 1
(D) 4 2 3
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

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(D) VI, I, III
21. Which of the following is correct formula to calculate Financial Leverage?
(A) Financial Leverage = EBT/EBIT
(B) Financial Leverage = EBIT/EPS
(C) Financial Leverage = EPS/EBIT
(D) Financial Leverage = EBIT/EBT
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%
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.
24. Operating leverage is directly _____ to business risk.
(A) Proportional
(B) Not proportional
(C) Unrelated
(D) Not related
25. A firm has a DFL of 5.5. What does this tell us about the firm?
2. MCQs ON THEORY ( With Answer Key )

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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.
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
3. Which of the following is not commonly used measures of leverage in financial

analysis?
(B) Financial Leverage
(C) Combined Leverage
(D) Matrix Leverage
4. _______ is the ratio of net operating income before fixed charges to net
operating income after fixed charges.
(C) Operation Leverage
(D) Fiscal Leverage
5. Operating leverage indicates the tendency of operating profits (EBIT) to vary

disproportionately with –
(A) Profit
(B) Fixed cost
(C) Sales
(D) EPS

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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).
(B) Combined Leverage
(C) Working Capital Leverage
(D) Financial Leverage
7. There is no operating leverage if there is no _______
(A) Profit
(B) Sales
(C) Fixed cost
(D) EPS
8. EBIT is usually the same thing as:
(A) Funds provided by operations
(B) Earnings before taxes
(C) Net income
(D) Operating profit
Contribution
(A) Operating Leverage =
EBIT
EBIT
(B) Operating Leverage =
Contribution
EBIT
(C) Operating Leverage =
Contribution

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Contribution
(D) Operating Leverage =
EBIT
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
% change in EPS
(A)
% change in Sales
% change in EBIT
(B)
% change in EPS
% change in EBIT
(C)
% change in Sales
% change in Sales
(D)
% change in EBIT
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

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(B) Minus
(C) Divided by
(D) Multiplied by
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.
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
15. If the fixed costs are high, the operating leverage will also be –
(A) Low
(B) High
(C) Zero
(D) Negative
16. Measure of business risk is –
(A) Operating leverage
(B) Financial leverage
(C) Combines leverage
(D) Working capital leverage
17. The presence of fixed costs in the total cost structure of a firm results into –
(C) Super Leverage

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(D) Progressive leverage
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.
below the lists:
List-I List-II
P. Factoring 1. Sales
Q. Operating leverage 2. Fixed interest cost
R. Debtors turnover ratio 3. Working capital
S. Financial leverage 4. Break- even point
5. Fixed cost
P Q R S
(A) 4 5 1 2
(B) 3 5 2 1
(C) 3 5 1 2
(D) 4 2 3 5

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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
(A) Financial Leverage = EBT/EBIT
(B) Financial Leverage =EBIT/EPS
(C) Financial Leverage = EPS/EBIT
(D) Financial Leverage = EBIT/EBT
(D) If sales rise by 1%, then EBIT will rise by 4.5%
23. High operating leverage shows –

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(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.
24. Operating leverage is directly _____ to business risk.
(A) Proportional
(B) Not proportional
(C) Unrelated
(D) Not related
(D) If sales rise by 1%, then EBIT will rise by 5.5%.
26. More operating leverage leads to –
(A) Less financial risk
(B) More financial risk
(C) More business risk
(D) Less business risk
(A) % change in EPS
% change in EBIT
(B) % change in EBIT
% change in EPS

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(C) % change in EBT
% change in EPS
(D) % change in Contribution
% change in EPS
28. Higher operating leverage is related to the use of additional __________
(A) Fixed costs
(B) Variable costs
(C) Debt financing
(D) Common equity financing
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).
30. Lower financial leverage is related to the use of additional __________
(A) Fixed costs
(B) Variable costs
(C) Debt financing
(D) Common equity financing
31. The operating leverage indicates the impact of changes in sales on –
(A) Operating income
(B) Operating cost
(C) Operating profit after tax

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(D) Operating sales
below the lists:
List-I List-II
T. Matching approach 1. Dividend policy
U. Combined leverage 2. Inventory management
V. Ordering quantity 3. Working capital
W. Bonus shares 4. Should low as compared other industries in firm
5. Authorized capital
T U V W
(A) 3 4 1 2
(B) 3 4 4 5
(C) 3 4 2 1
(D) 4 3 2 1
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

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34. Which of the following is correct formula to calculate Financial Leverage (FL)
when capital structure consists of preference shares and equity shares?
(A)
(B)
(C)
(D)
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]
36. Where a company has large amount of fixed interest charges, the financial
leverage will be ______
(A) High
(B) Low
(C) Negative
(D) Unreliable
37. Which of the following formulas represents the correct calculation of the
degree of financial leverage?

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(A) [NI + T + I]/[NI – I – PD/(1 – T)]
(B) EBIT/[EBIT – I – PD/(1 – T)]
(C) EBIT/[NI – I – PD/(1 – T)]
(D) All of the above are correct methods to calculate the degree of financial
leverage (DFL).
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
39. High financial leverage is not good as it indicates the large content of –
(A) Fixed cost
(B) Fixed interest charges
(C) Variable cost charges
(D) Contribution
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
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
42. If the Return on Investment (ROI) exceeds the rate of interest on debt, it is
_______ financial leverage.

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(A) Unfavourable
(B) Adverse
(C) A favourable
(D) Negative
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.
(A) (i), (ii) and (iv)
(B) (ii), (iii) and (iv)
(C) (i), (ii), (iii) and (iv)
(D) None of the above
44. High operating leverage combined with high financial leverage will constitute
–
(A) Favourable situation
(B) Positive situation
(C) Less risky situation
(D) Risky situation
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)

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(B) (ii), (iii) and (iv)
(C) (iii), (iv) and (i)
(D) (i), (ii) and (iv)
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 be low.
(D) Operating & financial leverage both should be high.
47. Assertion (A):
High operating leverage shows higher burden of fixed cost.
Reason (R):
As fixed cost goes on increasing EBIT reduces.
(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)
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.
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

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(C) The extent to which capital assets and fixed costs are utilized
(D) The difference between fixed costs and the contribution margin
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
2.1 PRACTICAL MCQs

51. 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 35%
Calculate Operating Leverage.
(A) 1.11
(B) 2.40
(C) 2.67
(D) 1.07
52. Output (units) = 3,00,000
Fixed cost = ` 3,50,000
Calculate Financial Leverage.

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(A) 1.11
(B) 2.40
(C) 2.67
(D) 1.07
53. Output (units) = 3,00,000
Fixed cost = ` 3,50,000
Calculate Combined Leverage.
(A) 2.67
(B) 2.30
(C) 2.00
(D) 2.15
54. 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
55. 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

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56. 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
57. 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
58. 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
59. 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
60. 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)

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61. 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
62. 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
63. If sales increase by 6% taxable income i.e. PAT and EPS will increase by 24%.
Combined leverage must be –
(A) 3
(B) 4
(C) 5
(D) 6
64. The capital structure of a company consists of the following securities.

65. `
10% Preference Share Capital 1
Equity Share Capital (` 10 Shares) 1
12% Debenture 7
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.

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(A) 1.1500
(B) 1.5466
(C) 1.1566
(D) 1.1554
65. 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%
66. 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
67. 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

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68. 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
69. 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
70. 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

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71. 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
72. 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
73. Contribution of a firm is ` 4,000.
Fixed Cost:
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

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(C) 2.86; 2.00; 3.64
(D) 1.33; 2.00; 4.00
74. EBIT of a firm is ` 3,000.
Financial Plan Plan I Plan II Plan II
Equity ` 5,000 ` 7,500 ` 2,500
Debt ` 5,000 ` 2,500 ` 7,500
Cost of debt 12% 12% 12%
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
75. Calculate Financial Leverage & EPS assuming 20% before tax rate of return on
assets. Other data:
76. (` in Lakhs
Particulars Solid Ltd. Sound Ltd.
Assets 100 100
12% Debt – 50
Equity (` 10 each) 100 50
Applicable tax rate firm is 50%.

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Solid Ltd. Sound Ltd.
EPS FL EPS
(A) 0.50 1.00 0.40
(B) 1.00 1.40 1.00
(C) 1.00 1.00 1.40
(D) 1.40 1.43 1.00
76. From the following data of Abhishek Ltd., compute the operating leverage,
financial leverage, combined leverage.
77. `
EBIT 10 lak
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
77. From the following data of Tanishka Ltd., compute the percentage change in
earnings per share (EPS), if sales are expected to increase by 5%:
78. `
EBIT 16.00 lakh

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Profit before tax (PBT) 6.40 lakh
Fixed cost 9.60 lakh
(A) 5%
(B) 10%
(C) 4%
(D) 20%
78. Following data is available for Alpha Ltd.
Financial leverage 2:1
Operating leverage 3:1
Interest charges ` 20 l
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
79. Following data is available for X Ltd.
Variable cost (% of sales) 70%
Interest expense ` 20,0

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DOL 5:1
DFL 3:1
EBIT = ?
(A) ` 30,000
(B) ` 20,000
(C) ` 60,000
(D) ` 15,000
80. Following data is available for Y Ltd.
Interest expense ` 30,000
DOL 6:1
DFL 4:1
Contribution = ?
(A) ` 9,60,000
(B) ` 2,40,000
(C) ` 3,00,000
(D) ` 7,80,000
81. Following data is available for Z Ltd.

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Interest expense ` 1,00,00
DOL 2:1
DFL 2:1
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:
Sales 4,00,00
Less: Variable expenses 1,40,00
Contribution 2,60,00
Less: Fixed expenses 1,80,00
EBIT 80,000
Less: Interest 10,000
Taxable income 70,000
82. What percentage will EBIT increase, if there is a 10% increase in sales?

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(A) 32.0%
(B) 31.14%
(C) 33.71%
(D) 32.5%
83. What percentage will taxable income increase, if EBIT increases by 6%?
(A) 6.86%
(B) 6.67%
(C) 6.33%
(D) 6.22%
84. 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:
Financial Plan

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Equity capital 5,000
10% Debt capital 15,000
20,000
85. What is the Operating Leverage?

86. Situation 1 Situation 2
(A) 2.00 1.67
(B) 1.67 1.33
(C) 1.67 2.00
(D) 1.33 1.67
86. What is the Financial Leverage?

Plan A Plan B Plan A
(A) 1.33 1.43 1.09
(B) 1.33 1.43 1.11
(C) 1.33 1.09 1.43
(D) 1.09 1.33 1.43

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87. What is the Combined Leverage?

Plan A Plan B Plan A
(A) 2.22 1.81 2.22
(B) 2.22 2.86 1.81
(C) 2.22 1.82 2.86
(D) 1.81 2.22 2.86
88. 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
89. 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
90. Which of the following company has greater business risk?
(` in lakhs)

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Particulars A Ltd. B Ltd. C Ltd. D
Sales 40 50 80 1
Variable cost (16) (15) (32) (
Contribution 24 35 48 7
Fixed cost (10) (20) (30) (
EBIT 14 15 18 2
(A) A Ltd.
(B) B Ltd.
(C) C Ltd.
(D) D Ltd.
91. 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
92. 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

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(B) 52.56
(C) 56.25
(D) 65.52
(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%
(D) If sales rise by 1% at the firm, then EBIT will rise by 3.5%.
95. 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
Answers:
1. (C) 2. (B) 3. (D) 4. (B) 5. (C) 6. (D) 7. (C)
8. (D) 9. (A) 10. (A) 11. (C) 12. (D) 13. (B) 14 (C)
15. (B) 16. (A) 17. (B) 18. (D) 19. (C) 20. (A) 21. (D)

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22. (D) 23. (C) 24. (A) 25. (C) 26. (C) 27. (A) 28. (A)
29. (D) 30. (D) 31. (A) 32. (C) 33. (D) 34. (C) 35. (D)
36. (A) 37. (B) 38. (A) 39. (B) 40. (B) 41. (A) 42. (C)
43. (D) 44. (D) 45. (B) 46. (C) 47. (D) 48. (C) 49. (C)
50. (C) 51. (B) 52. (A) 53. (A) 54. (A) 55. (C) 56. (A)
57. (C) 58. (D) 59. (D) 60. (D) 61. (B) 62. (D) 63. (B)
64. (B) 65. (A) 66. (C) 67. (A) 68. (B) 69. (D) 70. (D)
71. (C) 72. (C) 73. (D) 74. (D) 75. (C) 76. (A) 77. (D)
78. (D) 79. (A) 80. (B) 81. (C) 82. (D) 83. (A) 84. (A)
85. (C) 86. (C) 87. (C) 88. (A) 89. (B) 90. (D) 91. (D)
92. (C) 93. (D) 94. (C) 95. (A)
2.3 HINTS FOR IMPORTANT PRACTICAL MCQs
54. Combined Leverage = 2.1429 × 1.0699 = 2.2927

55. Combined Leverage = Operating Leverage × Financial Leverage
2 = x × 1.25
x = Operating Leverage = 2/1.25 = 1.6
56. Use hint of 55 and solve accordingly.

57.
Sales 1

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(-) Variable cost (
Contribution 6
(-) Fixed cost (
Earnings before interest & tax (EBIT) 3
(-) Interest (
Earnings before tax (EBT) 2
Contribution 60,
Combined Leverage = =
EBT 20,
66. Financial Leverage =
1.5465 =
1,38,000
1.5465 =
1,20,000 – 1.5385x
1,85,580 – 2.3792x = 1,38,000
2.3792x = 47,580
x = DP = 19,998 say 20,000
68. 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

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69. Financial Leverage = 3.5/2 = 1.75
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(A) Relationship between fixed cost and profit.

(B) Relationship between sales and fixed cost.

(C) Relationship between two inter- related variables.

(D) Relationship between two unrelated variables.

2. In financial analysis Leverage represents the influence of one ______ over

(A) Non-financial variable; financial variable

(B) Financial variable; financial variable

(C) Financial variable; non-financial variable

(D) Variable relating to revenue; financial variable

3. Which of the following is not commonly used measures of leverage in financial

(A) Operating Leverage

(B) Financial Leverage

(C) Combined Leverage

(D) Matrix Leverage

(A) Financial Leverage

(B) Operating Leverage

(C) Operation Leverage

(D) Fiscal Leverage

5. Operating leverage indicates the tendency of operating profits (EBIT) to vary

(B) Fixed cost

Downloaded by Punith Up (punithupchar@gmail.com)

(A) Operating Leverage

(B) Combined Leverage

(C) Working Capital Leverage

(D) Financial Leverage

7. There is no operating leverage if there is no _______

(C) Fixed cost

8. EBIT is usually the same thing as:

(A) Funds provided by operations

(B) Earnings before taxes

(C) Net income

(D) Operating profit

9. Which of the following is correct formula to calculate Operating Leverage?

(A) Operating Leverage = Contribution/EBIT

(B) Operating Leverage = Contribution/EBIT

(C) Operating Leverage = Contribution/EBIT

(D) Operating Leverage = Contribution/EBIT

Downloaded by Punith Up (punithupchar@gmail.com)

(C) Stay the same

11. Which of the following is correct formula to calculate Operating Leverage?

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.

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

Downloaded by Punith Up (punithupchar@gmail.com)

16. Measure of business risk is –

(A) Operating leverage

(B) Financial leverage