30 Lecture - . Business risk faced by firm, operating Leverage (OL), break-even point & ROE

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30 Lecture

MGT201

Midterm & Final Term Short Notes

. Business risk faced by firm, operating Leverage (OL), break-even point & ROE

Business risk refers to the uncertainties associated with a company's operations, which may affect its ability to generate profits. Operating leverage (OL) is the degree to which fixed costs are present in a company's cost structure. Break-even


Important Mcq's
Midterm & Finalterm Prepration
Past papers included

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  1. Which of the following refers to uncertainties associated with a company's operations that may affect its ability to generate profits? A) Financial risk B) Business risk C) Market risk D) Credit risk Answer: B) Business risk

  2. Operating leverage is the degree to which _____ costs are present in a company's cost structure. A) Variable B) Fixed C) Semi-variable D) None of the above Answer: B) Fixed

  3. Which of the following is the level of sales at which a company's revenue equals its total costs? A) Profit point B) Break-even point C) Margin of safety D) None of the above Answer: B) Break-even point

  4. Return on equity (ROE) is calculated by dividing: A) Net income by total equity B) Net income by total assets C) Total equity by net income D) Total assets by net income Answer: A) Net income by total equity

  5. A high operating leverage means that a company: A) Has high fixed costs and low variable costs B) Has low fixed costs and high variable costs C) Has equal fixed and variable costs D) None of the above Answer: A) Has high fixed costs and low variable costs

  6. Which of the following is NOT a factor that affects a company's break-even point? A) Selling price B) Variable costs C) Fixed costs D) Capital structure Answer: D) Capital structure

  7. Which of the following is a measure of a company's financial risk? A) Operating leverage B) Break-even point C) Debt-to-equity ratio D) None of the above Answer: C) Debt-to-equity ratio

  8. A company with a high degree of operating leverage is: A) More sensitive to changes in sales volume B) Less sensitive to changes in sales volume C) Not affected by changes in sales volume D) None of the above Answer: A) More sensitive to changes in sales volume

  9. If a company's ROE is higher than its cost of equity, then: A) The company is generating a profit B) The company is generating a loss C) The company is operating at its break-even point D) None of the above Answer: A) The company is generating a profit

  10. Which of the following is a measure of a company's profitability? A) Operating leverage B) Break-even point C) Gross profit margin D) Debt-to-equity ratio Answer: C) Gross profit margin



Subjective Short Notes
Midterm & Finalterm Prepration
Past papers included

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  1. What is business risk, and how does it impact a company's financial performance? Answer: Business risk refers to the uncertainties associated with a company's operations that may affect its ability to generate profits. It impacts a company's financial performance by affecting its revenue and costs.

  2. What is operating leverage, and how does it impact a company's risk profile? Answer: Operating leverage is the degree to which fixed costs are present in a company's cost structure. It impacts a company's risk profile by making it more sensitive to changes in sales volume, which can either increase or decrease the company's profitability.

  3. How is break-even point calculated, and why is it important for a company to know its break-even point? Answer: Break-even point is calculated by dividing fixed costs by the contribution margin per unit. It is important for a company to know its break-even point because it helps to determine the minimum amount of sales required to cover its costs and generate a profit.

  4. What is ROE, and how is it calculated? Answer: ROE is a financial ratio that measures a company's profitability by calculating the amount of net income returned as a percentage of shareholders' equity. It is calculated by dividing net income by total equity.

  5. How does a company's capital structure impact its risk profile and cost of capital? Answer: A company's capital structure impacts its risk profile and cost of capital by affecting its debt-to-equity ratio, which can increase or decrease its financial risk and cost of capital.

  6. What are some factors that affect a company's operating leverage, and how do they impact the company's financial performance? Answer: Some factors that affect a company's operating leverage include the mix of fixed and variable costs, pricing strategy, and sales volume. They impact the company's financial performance by affecting its revenue and costs.

  7. How does a company's break-even point change when its variable costs increase? Answer: When a company's variable costs increase, its break-even point increases because it needs to sell more units to cover its costs and generate a profit.

  8. What is the relationship between a company's break-even point and its operating leverage? Answer: The higher a company's operating leverage, the lower its break-even point because it has a higher contribution margin per unit, which means it needs to sell fewer units to cover its fixed costs.

  9. What is the impact of a company's business risk on its cost of capital? Answer: The higher a company's business risk, the higher its cost of capital because investors require a higher return to compensate for the increased risk.

  10. How can a company increase its ROE? Answer: A company can increase its ROE by increasing its net income or decreasing its total equity. This can be achieved through various strategies, such as increasing sales revenue, reducing expenses, or increasing profit margins.

Business risk is the risk associated with the uncertainties that a company may face in its operations, which may impact its profitability. These risks can arise due to various factors, such as changes in market conditions, competition, or technological advancements. A company's operating leverage (OL) is a measure of its fixed costs in relation to its variable costs. The higher the OL, the more sensitive a company's profits are to changes in sales volume. This is because fixed costs remain constant, while variable costs change with the level of sales. The break-even point is the point at which a company's total revenue equals its total costs. It is important for a company to know its break-even point as it helps to determine the minimum level of sales required to cover its costs and generate a profit. The break-even point can be calculated by dividing fixed costs by the contribution margin per unit. Return on equity (ROE) is a financial ratio that measures a company's profitability by calculating the amount of net income returned as a percentage of shareholders' equity. A high ROE indicates that a company is generating a higher return on the investment made by its shareholders. A company's business risk, OL, break-even point, and ROE are interrelated. A high OL can increase a company's risk profile, as it becomes more sensitive to changes in sales volume. This can impact the company's break-even point, as an increase in fixed costs can result in a higher break-even point. A higher business risk can also impact a company's cost of capital, as investors may require a higher return to compensate for the increased risk. To increase its ROE, a company can take various measures, such as increasing sales revenue, reducing expenses, or improving profit margins. This can be achieved by implementing effective marketing strategies, improving operational efficiency, or focusing on innovation and product development. In summary, a company's business risk, OL, break-even point, and ROE are important factors that impact its financial performance. Companies need to assess and manage these factors to minimize risks and optimize profitability.

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