If debt financing is used, which of the following is true?
A) The percentage change in net operating income is greater than a given percentage change in net income.
B) The percentage change in net operating income is equal to a given percentage change in net income.
C) The percentage change in net income relative to the percentage change in net operating income depends on the interest rate charged on debt.
D) The percentage change in net operating income is less than the percentage change in net income.
E) The degree of operating leverage is greater than 1.

Question

Quizplus · Accepted Answer

If debt financing is used, it involves paying interest on the borrowed amount. This reduces the net income and hence a given percentage change in net operating income will lead to a larger percentage change in net income. Therefore, the percentage change in net operating income is less than the percentage change in net income.

If Debt Financing Is Used, Which of the Following Is