Which of the following is true of the degree of total leverage?
A)It is the product of the degree of financial leverage and the degree of operating leverage.
B)It is the sum of the degree of financial leverage and the degree of operating leverage.
C)It is the difference between the degree of financial leverage and the degree of operating leverage.
D)It is the relative change in financial leverage with respect to the operational leverage.

Question

Quizplus · Accepted Answer

The degree of total leverage is the product of the degree of financial leverage and the degree of operating leverage. The degree of financial leverage measures the sensitivity of earnings per share to changes in EBIT, while the degree of operating leverage measures the sensitivity of EBIT to changes in sales. Multiplying these two measures gives us the overall sensitivity of earnings per share to changes in sales, or the degree of total leverage.

Which of the Following Is True of the Degree of Total