Because the degree of total leverage is multiplicative and not additive, when a firm has very high operating leverage it can moderate its total risk by
A) using more financial leverage.
B) increasing EBIT.
C) using a lower level of financial leverage.
D) increasing sales.

Question

Quizplus · Accepted Answer

When a firm has very high operating leverage, it means that a large proportion of its costs are fixed costs, which means that small changes in sales can result in large changes in profits. If the firm also uses a high level of financial leverage, it can amplify this effect, leading to potentially unpredictable and significant changes in profits. In order to moderate total risk, the firm should use a lower level of financial leverage.

Because the Degree of Total Leverage Is Multiplicative and Not