Financial leverage magnifies:
A)
earnings per share variability.
B)
taxes.
C)
operating income variability.
from Kaplan Schweser
Could somebody explain the answer
there are 2 leverage: Financial Leverage and Operating Leverage
The Financial Leverage reflects the capital structure of the firm (equity and dept)
The Operating Leverage is the degree to which capital asset and associated fixed cost are used. 7
My answer is A: EPS variance
Financial Leverage meaning how much debt the company is taking (EBIT)/ (EBIT- Interest)
Operating leverage meaning how much fixed cost is used. (Sales - Variable Cost)/ (Sales - variable cost - fixed cost)
Therefore, Financial leverage is not affecting operating income variability. It only affects the interest that company has to pay
Therefore, my answer would be A
Correct me if I am wrong.
Financial leverage is % change in EPS/ % change in EBIT. Operating income or EBIT is not affected by financial leverage because it includes interest. So answer has to be A.
It really depends on what the author of question means by “magnifies”.
If he (it’s gotta be a he; a she wouldn’t write such an ambiguous question) means strictly “increases”, then the answer has to be A.
If he means “changes the size of”, then it could be A or B, because financial leverage reduces taxes.