2A2H WHICH ONE OF THE FOLLOWING STATEMENTS CONCERNING THE EFFECTS OF...

43. - CMA EXAM SUPPORT PACKAGE 2
CMA EXAM SUPPORT PACKAGE 2

43.

CSO: 2A2b

LOS: 2A2h

Which one of the following statements concerning the effects of leverage on earnings

before interest and taxes (EBIT) and earnings per share (EPS) is correct?

a.

For a firm using debt financing, a decrease in EBIT will result in a proportionally

larger decrease in EPS.

b.

A decrease in the financial leverage of a firm will increase the beta value of the

firm.

c.

If Firm A has a higher degree of operating leverage than Firm B, and Firm A

offsets this by using less financial leverage, then both firms will have the same

variability in EBIT.

d.

Financial leverage affects both EPS and EBIT, while operating leverage only

effects EBIT.