os % 165 5) OPERATING LEVERAGE Which of the following statements regarding operating leverage is TRUE? a) A firm with high operating leverage would be expected to experience a large percentage decrease in EBIT with a small percentage increase in sales. b) A firm with high operating leverage would be expected to have its profits increase more rapidly to an increase in sales than a firm with low operating leverage. c) A firm with high operating leverage would be expected to have higher variable costs and lower fixed costs. d) A firm with high operating leverage would be expected to experience less risk (variation) in their cash flows. 6) FINANCIAL LEVERAGE ets. Firm A finances its operations with 100% at an 6) FINANCIAL LEVERAGE Firm A & Firm B each have $200,000 in assets. Firm A finances its operations with 100% equity, while Firm B finances operations with 50% equity and 50% long-term debt at an interest rate of 10%. Each firm generates a return on assets of 25%. Assuming that both companies do not pay taxes, which statement is TRUE? a) Firm A is using financial leverage, generating a ROE (return on equity) of 25%. b) Firm B is using financial leverage, generating a ROE (return on equity) of 50%. c) Firm A is using financial leverage, generating a ROE (return on equity) of 20%. d) Firm B is using financial leverage, generating a ROE (return on equity) of 40%