A company with a higher proportion of fixed costs will create
A) a higher degree of sensitivity of EBITDA to a change in revenues.
B) a lower degree of sensitivity of EBITDA to a change in revenues.
C) no discernible difference of a change in sensitivity of EBITDA to a change in revenues.
D) a company with a much more stable profit stream as a function of revenues.

Question

Quizplus · Accepted Answer

A higher proportion of fixed costs means that a larger portion of the company's expenses are not affected by changes in revenue. This, in turn, creates a higher degree of sensitivity of EBITDA (earnings before interest, taxes, depreciation, and amortization) to a change in revenues. In other words, small changes in revenue can have a significant impact on EBITDA because the fixed costs remain the same.

A Company with a Higher Proportion of Fixed Costs Will