If a high percentage of an entity's total costs is fixed, the entity's operating leverage will be:
Answer(s): A
In business terminology, a high degree of operating leverage, other things held constant, means that a relatively small change in sales will result in a large change in operating income. Therefore, if a high percentage of an entity's total cost is fixed, the entity is said to have a high degree of operating leverage.
When comparing two companies, if all else is equal, the entity that has a higher dividend payout ratio will have a:
The higher the dividend payout ratio, the sooner retained earnings are exhausted and the entity must seek more costly, outside equity financing. This drives the marginal cost of capital.
The efficient markets theory implies that securities prices are:
Answer(s): B
The efficient markets theory proposes that the market is continuously adjusting to new information and acting to correct pricing errors.
The funds-needed line does not pass through the origin unless the entity has a:
If all earnings are paid out as dividends, then there is no earnings retention. All sales growth must be financed from spontaneous or external sources:
If all else is equal, entities with higher profit margins require less additional financing for any sales growth rate. If the profit marlin of an entity increased, the funds-needed line would shift:
Answer(s): C
A higher profit margin would reduce the additional financing needed, shifting the funds needed line down.
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