Which of the following statements is most correct?
A)The degree of combined leverage measures the sensitivity of earnings per share ininto changes in EBIT.
B)A firm's business risk is measured by its variability in earnings per share over time.
C)A firm's degree of combined leverage is the product of its degree of operating leverage and its degree of financial leverage.
D)All the above statements are false.

Question

Quizplus · Accepted Answer

The degree of combined leverage is the product of a firm's degree of operating leverage and its degree of financial leverage. Option A is incorrect because the degree of financial leverage measures the sensitivity of earnings per share to changes in EBIT, not the degree of combined leverage. Option B is incorrect because a firm's business risk is measured by the variability of its operating income (or EBIT), not its earnings per share. Option D is incorrect because option C is true.

Which of the Following Statements Is Most Correct