Here are 30 MCQ Questions on Operating Leverage, Financial Leverage, Combined Leverage (DOL, DFL, DCL/DTL) – aligned with US CMA Part 2 (Corporate Finance) syllabus.SOLVE FIRST THEN CHECK ✔️ YOURSELF,ANSWERS AT THE END.
✅ MCQs on Operating & Financial Leverage
1. Degree of Operating Leverage (DOL) measures:
A. Sensitivity of EPS to EBIT
B. Sensitivity of EBIT to sales
C. Sensitivity of sales to fixed cost
D. Sensitivity of net income to tax
Answer:
2. A company has high fixed costs and low variable costs. It most likely has:
A. Low operating leverage
B. High operating leverage
C. Low financial leverage
D. No leverage
Answer:
3. DOL at a given sales level is calculated as:
A. Contribution Margin / Net Income
B. EBIT / Contribution Margin
C. Contribution Margin / EBIT
D. Sales / Variable Cost
Answer:
4. If sales increase by 10% and EBIT increases by 30%, DOL equals:
A. 0.33
B. 3
C. 1.5
D. 2
Answer:
5. Financial leverage arises due to:
A. Fixed operating costs
B. Variable costs
C. Fixed financial costs
D. Taxes
Answer:
6. Degree of Financial Leverage (DFL) measures:
A. Sensitivity of EBIT to sales
B. Sensitivity of EPS to EBIT
C. Sensitivity of sales to EPS
D. Sensitivity of EBIT to fixed cost
Answer:
7. DFL formula at a given EBIT level:
A. EBIT / EBT
B. Contribution / EBIT
C. Sales / EBIT
D. Net Income / EBIT
Answer:
8. If EBIT increases by 20% and EPS increases by 40%, DFL is:
A. 0.5
B. 2
C. 1
D. 4
Answer:
9. Combined Leverage (DCL or DTL) equals:
A. DOL + DFL
B. DOL – DFL
C. DOL × DFL
D. DOL / DFL
Answer:
10. DCL measures:
A. Sensitivity of EPS to sales
B. Sensitivity of EBIT to sales
C. Sensitivity of sales to EPS
D. Sensitivity of EPS to EBIT
Answer:
🔢 Numerical Based MCQs
11. Sales = $500,000; Variable Cost = $300,000; Fixed Cost = $100,000.
DOL equals:
A. 1
B. 2
C. 4
D. 3
Contribution = 200,000
EBIT = 100,000
DOL = 200,000 / 100,000 = 2
Answer:
12. EBIT = $200,000; Interest = $50,000
DFL equals:
A. 1.33
B. 2
C. 4
D. 0.75
DFL = 200,000 / 150,000 = 1.33
Answer:
13. If DOL = 2 and DFL = 3, DCL equals:
A. 5
B. 6
C. 1
D. 0.67
Answer:
14. If sales increase 10% and DCL = 4, EPS will increase:
A. 40%
B. 4%
C. 14%
D. 10%
Answer:
15. A firm with no debt will have:
A. DFL = 0
B. DFL = 1
C. DFL > 1
D. Negative DFL
Answer:
16. At break-even point, DOL is:
A. 0
B. 1
C. Very high (infinite)
D. Negative
Answer:
17. Which increases operating leverage?
A. Increasing variable cost
B. Increasing fixed cost
C. Decreasing sales
D. Increasing tax
Answer:
18. Which increases financial leverage?
A. Issuing equity
B. Reducing debt
C. Increasing debt
D. Increasing variable cost
Answer:
19. High DOL implies:
A. Low business risk
B. High business risk
C. Low financial risk
D. No risk
Answer:
20. High DFL implies:
A. High business risk
B. High financial risk
C. Low EPS volatility
D. No bankruptcy risk
Answer:
📊 Advanced / Conceptual MCQs
21. If a firm substitutes fixed costs for variable costs:
A. Break-even decreases
B. Operating leverage decreases
C. Operating leverage increases
D. Financial leverage increases
Answer:
22. If EBIT = Interest, DFL will be:
A. 0
B. 1
C. Infinite
D. Negative
Answer:
23. Combined leverage risk is highest when:
A. Fixed operating and financial costs are low
B. Fixed operating costs are low and debt is zero
C. Both operating and financial leverage are high
D. Sales are stable
Answer:
24. Contribution margin ratio is important in calculating:
A. DFL
B. DOL
C. EPS
D. Tax shield
Answer:
25. Which leverage affects EBIT?
A. Financial leverage
B. Combined leverage
C. Operating leverage
D. Tax leverage
Answer:
26. Which leverage affects EPS directly?
A. Operating leverage only
B. Financial leverage
C. Sales leverage
D. Working capital leverage
Answer:
27. If DOL = 1, it indicates:
A. No fixed operating cost
B. High fixed cost
C. High debt
D. Break-even
Answer:
28. A firm near break-even should:
A. Increase debt
B. Reduce fixed costs
C. Increase DOL
D. Increase DFL
Answer:
29. If sales fall 5% and DCL = 3, EPS will:
A. Increase 15%
B. Decrease 15%
C. Decrease 3%
D. Increase 3%
Answer:
30. Optimal capital structure balances:
A. Sales and variable cost
B. Business risk and financial risk
C. Contribution and EBIT
D. Tax and dividend
Answer:
ANSWERS:
✅ MCQs on Operating & Financial Leverage
1. Degree of Operating Leverage (DOL) measures:
A. Sensitivity of EPS to EBIT
B. Sensitivity of EBIT to sales
C. Sensitivity of sales to fixed cost
D. Sensitivity of net income to tax
Answer: B
2. A company has high fixed costs and low variable costs. It most likely has:
A. Low operating leverage
B. High operating leverage
C. Low financial leverage
D. No leverage
Answer: B
3. DOL at a given sales level is calculated as:
A. Contribution Margin / Net Income
B. EBIT / Contribution Margin
C. Contribution Margin / EBIT
D. Sales / Variable Cost
Answer: C
4. If sales increase by 10% and EBIT increases by 30%, DOL equals:
A. 0.33
B. 3
C. 1.5
D. 2
Answer: B
(30% / 10% = 3)
5. Financial leverage arises due to:
A. Fixed operating costs
B. Variable costs
C. Fixed financial costs
D. Taxes
Answer: C
6. Degree of Financial Leverage (DFL) measures:
A. Sensitivity of EBIT to sales
B. Sensitivity of EPS to EBIT
C. Sensitivity of sales to EPS
D. Sensitivity of EBIT to fixed cost
Answer: B
7. DFL formula at a given EBIT level:
A. EBIT / EBT
B. Contribution / EBIT
C. Sales / EBIT
D. Net Income / EBIT
Answer: A
8. If EBIT increases by 20% and EPS increases by 40%, DFL is:
A. 0.5
B. 2
C. 1
D. 4
Answer: B
(40% / 20% = 2)
9. Combined Leverage (DCL or DTL) equals:
A. DOL + DFL
B. DOL – DFL
C. DOL × DFL
D. DOL / DFL
Answer: C
10. DCL measures:
A. Sensitivity of EPS to sales
B. Sensitivity of EBIT to sales
C. Sensitivity of sales to EPS
D. Sensitivity of EPS to EBIT
Answer: A
🔢 Numerical Based MCQs
11. Sales = $500,000; Variable Cost = $300,000; Fixed Cost = $100,000.
DOL equals:
A. 1
B. 2
C. 4
D. 3
Contribution = 200,000
EBIT = 100,000
DOL = 200,000 / 100,000 = 2
Answer: B
12. EBIT = $200,000; Interest = $50,000
DFL equals:
A. 1.33
B. 2
C. 4
D. 0.75
DFL = 200,000 / 150,000 = 1.33
Answer: A
13. If DOL = 2 and DFL = 3, DCL equals:
A. 5
B. 6
C. 1
D. 0.67
Answer: B
14. If sales increase 10% and DCL = 4, EPS will increase:
A. 40%
B. 4%
C. 14%
D. 10%
Answer: A
15. A firm with no debt will have:
A. DFL = 0
B. DFL = 1
C. DFL > 1
D. Negative DFL
Answer: B
16. At break-even point, DOL is:
A. 0
B. 1
C. Very high (infinite)
D. Negative
Answer: C
17. Which increases operating leverage?
A. Increasing variable cost
B. Increasing fixed cost
C. Decreasing sales
D. Increasing tax
Answer: B
18. Which increases financial leverage?
A. Issuing equity
B. Reducing debt
C. Increasing debt
D. Increasing variable cost
Answer: C
19. High DOL implies:
A. Low business risk
B. High business risk
C. Low financial risk
D. No risk
Answer: B
20. High DFL implies:
A. High business risk
B. High financial risk
C. Low EPS volatility
D. No bankruptcy risk
Answer: B
📊 Advanced / Conceptual MCQs
21. If a firm substitutes fixed costs for variable costs:
A. Break-even decreases
B. Operating leverage decreases
C. Operating leverage increases
D. Financial leverage increases
Answer: C
22. If EBIT = Interest, DFL will be:
A. 0
B. 1
C. Infinite
D. Negative
Answer: C
23. Combined leverage risk is highest when:
A. Fixed operating and financial costs are low
B. Fixed operating costs are low and debt is zero
C. Both operating and financial leverage are high
D. Sales are stable
Answer: C
24. Contribution margin ratio is important in calculating:
A. DFL
B. DOL
C. EPS
D. Tax shield
Answer: B
25. Which leverage affects EBIT?
A. Financial leverage
B. Combined leverage
C. Operating leverage
D. Tax leverage
Answer: C
26. Which leverage affects EPS directly?
A. Operating leverage only
B. Financial leverage
C. Sales leverage
D. Working capital leverage
Answer: B
27. If DOL = 1, it indicates:
A. No fixed operating cost
B. High fixed cost
C. High debt
D. Break-even
Answer: A
28. A firm near break-even should:
A. Increase debt
B. Reduce fixed costs
C. Increase DOL
D. Increase DFL
Answer: B
29. If sales fall 5% and DCL = 3, EPS will:
A. Increase 15%
B. Decrease 15%
C. Decrease 3%
D. Increase 3%
Answer: B
30. Optimal capital structure balances:
A. Sales and variable cost
B. Business risk and financial risk
C. Contribution and EBIT
D. Tax and dividend
Answer: B
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