Financial Management - Study Mode

[#101] Which of the following is the expression for operating leverage?
Correct Answer

(A) Contribution/EBIT

Explanation

Solution: Contribution/EBIT is the expression for operating leverage. Operating leverage is a cost-accounting formula that measures the degree to which a firm or project can increase operating income by increasing revenue.

[#102] The material wealth of a society is equal to the sum of _________.
Correct Answer

(C) all financial and real assets

Explanation

Solution: The material wealth of a society is equal to the sum of all financial and real assets. The material wealth of a society is determined ultimately by the productive capacity of its economy— the goods and services that can be provided to its members.

[#103] Operating Leverage is the response of changes in __________
Correct Answer

(A) EBIT to the changes in sales

Explanation

Solution: Operating Leverage is the response of changes in EBIT to the changes in sales. Operating leverage is a cost-accounting formula that measures the degree to which a firm or project can increase operating income by increasing revenue.

[#104] _______ is example of financial intermediaries.
Correct Answer

(D) All of the above

Explanation

Solution: Commercial banks, Investment bank and Insurance companies are example of financial intermediaries.

[#105] Walters model on dividend policy assumes that.
Correct Answer

(A) the firm offers an increasing amount of dividend per share at a given level of price per share

Explanation

Solution: Walter's Model is a dividend relevance theory proposed by Professor James E. Walter. It emphasizes the relationship between the firm’s internal rate of return (r), cost of capital (k), and dividend policy in determining the market price of shares. Key Assumptions of Walter’s Model: 1. The firm is financed entirely by equity and does not use debt. 2. The internal rate of return (r) and the cost of capital (k) are constant. 3. All earnings are either distributed as dividends or reinvested immediately. 4. The firm has a very long or potentially infinite life. 5. The firm offers an increasing amount of dividend per share at a given level of price per share, reflecting how dividend policy influences valuation in the model. Why Other Options Are Incorrect: Option B: The model assumes the firm has an infinite life, not a finite one. Option C: Walter’s model is based on the assumption that the cost of capital remains constant. Option D: This statement is related to balance sheet accounting and is not relevant to dividend policy under Walter's model. Hence, the correct answer is: the firm offers an increasing amount of dividend per share at a given level of price per share.