It is possible that two firms could have identical financial and operating leverage, yet have different degrees of risk as measured by the variability of EPS.

Question

Quizplus · Accepted Answer

While financial and operating leverage determine the level of fixed costs a company has, the variability of EPS also depends on other factors such as sales volume, pricing strategy, competition, and cost structure. Therefore, two firms with identical leverage ratios may still experience different levels of risk due to differences in these other factors.

It Is Possible That Two Firms Could Have Identical Financial