A firm's degree of combined leverage can be measured as degree of operating leverage __________ the degree of financial leverage:
A) plus
B) minus
C) times
D) divided by

Question

Quizplus · Accepted Answer

The degree of combined leverage is calculated by multiplying the degree of operating leverage with the degree of financial leverage. This is because the degree of operating leverage measures the sensitivity of operating income to changes in sales, while the degree of financial leverage measures the sensitivity of earnings per share to changes in operating income. Multiplying these two measures gives a firm's overall sensitivity to changes in sales and provides a measure of its degree of combined leverage.

A Firm's Degree of Combined Leverage Can Be Measured as Degree