The higher the financial breakeven point and the steeper the slope of the capital structure line, the greater the financial risk.

Question

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Financial breakeven point is the level of sales at which the company neither earns a profit nor suffers a loss. A higher financial breakeven point implies that the company is more dependent on volume of sales to cover its fixed costs. The steeper the slope of the capital structure line, the larger the proportion of debt in the financing mix. This indicates that the company has a higher financial leverage. Higher financial leverage amplifies the impact of operating leverage on the earnings of the company. Therefore, the combination of higher financial breakeven point and steeper slope of capital structure line results in a higher level of financial risk.

The Higher the Financial Breakeven Point and the Steeper the Slope