What is the relationship between the margin of safety percentage and the degree of operating leverage?
A) They are unrelated
B) They are always the same
C) They are reciprocals
D) They are both subject to management bias

Question

Quizplus · Accepted Answer

The margin of safety and the degree of operating leverage have an inverse relationship, meaning that as the margin of safety percentage increases, the degree of operating leverage decreases, and vice versa. This is because a higher margin of safety typically means there is less risk and therefore less financial leverage, leading to a lower degree of operating leverage. On the other hand, a lower margin of safety percentage means there is more risk and more financial leverage, leading to a higher degree of operating leverage. Therefore, the answer is C - they are reciprocals.

What Is the Relationship Between the Margin of Safety Percentage