A firm's DOL affects the amount of debt it can issue.

Question

Quizplus · Accepted Answer

The Degree of Operating Leverage (DOL) is a measure of a firm's ability to use fixed costs in operations to generate profits. A higher DOL indicates that a firm has greater operating leverage, which means that it has a higher proportion of fixed costs compared to variable costs. This can impact the amount of debt a firm can issue because lenders may be concerned about a high DOL leading to increased financial risk. Therefore, a firm with a higher DOL may have difficulty obtaining as much debt financing as a firm with a lower DOL.

A Firm's DOL Affects the Amount of Debt It Can