The combined impact of operating leverage and financial leverage on the firm's EPS is:
A)additive.
B)geometric.
C)multiplicative.
D)None of the above

Question

Quizplus · Accepted Answer

The impact of operating leverage and financial leverage on a firm's EPS is multiplicative. Operating leverage refers to the extent to which fixed costs are present in a company's cost structure, while financial leverage refers to the extent to which a company uses debt financing. When a company has high levels of fixed costs and uses debt financing, small changes in sales can lead to much larger changes in EPS. This multiplicative effect can be seen in the formula for EPS: EPS = (Sales - Variable Costs - Fixed Costs - Interest Expense) / Shares Outstanding. As a result, the combined impact of operating and financial leverage on EPS is multiplicative.

The Combined Impact of Operating Leverage and Financial Leverage on the Firm's