Leverage MCQ : Multiple Choice Questions and Answers

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Financial Management MCQ

This Leverage MCQ will help you to score more marks in your exam.

Financial management MCQ : Chapter Wise

Multiple Choice Questions and Answers

1. Which of the following is studied with the help of operating leverage?

  1. Analysis of Business Risk
  2. Analysis of Financial Risk
  3. Analysis of Production Risk
  4. Analysis of Credit Risk

Answer :- Analysis of Business Risk

2. Which formula is used to measure the degree of operating leverage?

  1. EBT/EBIT
  2. Contribution/EBIT
  3. EBIT/EBT
  4. EBIT/Contribution

Answer :- Contribution/EBIT

3. High operating leverage indicates a company has:

  1. High fixed cost
  2. Low variable cost
  3. Both a & b
  4. None of the above

Answer :- Both a & b

4. Financial risk is analysed with the help of:

  1. Operating leverage
  2. Financial leverage
  3. Combined leverage

Answer :- Financial leverage

5. Which formula is used to measure the degree of financial leverage?

  1. EBT/EBIT
  2. Contribution/EBIT
  3. EBIT/EBT
  4. EBIT/Contribution

Answer :- EBIT/EBT

6. Financial leverage is also known as:

  1. Composite leverage
  2. Breakeven point
  3. Trading on equity
  4. Capital structure leverage

Answer :- Trading on equity

7. Financial Leverage is intended to:

  1. Increase return on capital employed
  2. Increase net equity return
  3. Decrease volatility in return
  4. Increase return on capital employed and net equity

Answer :- Increase return on capital employed and net equity

8. The extent to which an organization uses fixed cost on its cost structure is called:

  1. Overall leverage
  2. Financial leverage
  3. Fixed Leverage
  4. Operating leverage

Answer :- Operating leverage

9. Use of fixed interest securities in the capital structure is called:

  1. Operating leverage
  2. Financial leverage
  3. Overall leverage
  4. None of the above

Answer :- Financial leverage

10. Margin of safety is in the following way related to degree of operating leverage:

  1. Reciprocal
  2. Equal
  3. Square
  4. Bank overdraft

Answer :- Reciprocal

11. Statements:

The greater a firm degree of operating leverage, the more its EBIT will vary with respect to fluctuations in sales.

The greater a firm degree of operating leverage, the less its EBIT will vary with fluctuations in sales.

Options:

  1. Both correct
  2. Both incorrect
  3. 1 correct, 2 incorrect
  4. 1 incorrect, 2 correct

Answer :-  Both incorrect

12. The use of long-term fixed interest bearing debt and preference share capital along with equity share capital is called:

  1. Operating leverage
  2. Financial leverage
  3. Overall leverage
  4. None of the above

Answer :- Financial leverage

13. High financial leverage indicates:

  1. Amount of debt is high as compared to stock
  2. Risky investments
  3. Fixed assets are purchased with debts
  4. All of the above

Answer :- All of the above

14. Financial leverage will be one when:

  1. Debt is more than equity
  2. Debt is less than equity
  3. Debt is NIL
  4. Preference dividend is nil

Answer :- Debt is NIL

15. EPS will be zero at

  1. Financial Breakeven point
  2. Operating breakeven point
  3. Both a & b above
  4. None of the above

Answer :- Financial Breakeven point

16. Degree of operating leverage of 1.5 means:

  1. If sales increase by 1.5%, the EBIT will increase by 1%
  2. If EBIT increase by 1%, the EPS will increase by 1 %
  3. If sales rise by 1%, EBIT will rise by 1.5%
  4. If sales rise by 1%, EBIT will remain unaffected

Answer :- If sales rise by 1%, EBIT will rise by 1.5%

17. If fixed cost becomes zero, then which one of the following statement is correct?

  1. OL will be 0
  2. OL will be 1
  3. FL will be 0
  4. FL will be 1

Answer :- OL will be 1

18. Composite leverage (CL) will be calculated as:

  1. CL = OL + FL
  2. CL = OL x FL
  3. CL = OL/FL
  4. None of the above

Answer :- CL = OL x FL

19. Which combination of leverage is generally good for the firms?

  1. High OL, High FL
  2. Low OL, Low FL
  3. High OL, Low FL
  4. None of these

Answer :- High OL, Low FL

20. Operating leverage arises because of:

  1. Fixed Production cost
  2. Fixed Interest Cost
  3. Variable Cost

Answer :- Fixed Production cost

21. Financial Leverage arises because of:

  1. Fixed production cost
  2. Variable Cost
  3. Fixed Interest Cost

Answer :- Fixed Interest Cost

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