B2 - M2: Capital Structure Part 2

Question 1

What is Financial Leverage?

Answer 1

The degree of debt in a company’s capital structure.

Question 2

What happens to Financial Leverage if the Debt to Equity Ratio goes up?

Answer 2

Financial Leverage goes up if a greater portion of the company’s capital is derived from Debt.

Question 3

What is Operating Leverage?

Answer 3

The degree to which a company uses FIXED COSTS as opposed to variable costs.

Question 4

What is EBIT?

Answer 4

EBIT; Earnings Before Interest and Taxes

Question 5

How is EBIT Calculated?

Answer 5

EBIT = Operating Income plus Non-Operating Income

Question 6

What is Operating Income?

Answer 6

Operating Income = Gross Income less Operating Expenses

Question 7

What is Debt Ratio?

Answer 7

“The ratio of Liabilities to Assets
Debt Ratio = Total Liabilities / Total Assets”

Question 8

What is Debt to Equity Ratio?

Answer 8

“The ratio of Liabilities to Equity Financing
Debt to Equity Ratio = Total Liabilities / Total Equity”

Question 9

What is the Accounting Equation?

Answer 9

Assets = Liabilites + Equity

Question 10

What is Times Interest Earned Ratio?

Answer 10

The number of times Annual Interest Charges are covered by Net Operating Income.

Question 11

How is Times Interest Earned Ratio calculated?

Answer 11

Times Interest Earned Ratio = EBIT / Interest Expense