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

Variability of EPS can be impacted by factors such as differences in revenue growth rates, competitive pressures, and changes in market conditions, which may vary between two firms with the same leverage ratios. Therefore, two firms with identical financial and operating leverage may still have different levels of risk as measured by EPS variability.

Two Firms Could Have Identical Financial and Operating Leverage, Yet