Which of the following statements regarding leverage is TRUE? A)A firm with high business risk is more likely to increase its use of financial leverage than a firm with low business risk. B)Financial leverage is inversely related to operating leverage. C)A firm with low operating leverage has a small proportion of its total costs in fixed costs. D)High levels of financial leverage increase business risk while high levels of operating leverage will decrease business risk.
I’d say “c”: the operating leverage is a ratio of fixed costs to variable costs
This is a good question I’ll give it a try D is false high levels of operating leverage means that income si more volatile therefore increased business risk C is false - opposite than the def of operating leverage A is false - a firm that has low bussiness risk is more likely to be able to issue debt plus that the use of financial leverage would increase the risk for the shareholders B - although I thought that was false too because if financial leverage is high means that assets are high and probably fixed costs are high I’ll go with that answer based on dupont ratio in which income/sales is inversly related to financial leverage given a fixed ROe So i’d say B
Sorry I missread C must be tired so I guess B is wrong
C should be the correct answer,it’s the definition of the operating leverage. which one is the answer?
C is the correct answer