Foundations of Financial Management Study Set 5
Quiz 5: Operating and Financial Leverage
Operating Leverage Influences the Bottom Half of the Income Statement
Operating leverage influences the bottom half of the income statement while financial leverage deals with the top half.
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The degree of combined leverage is the sum of the degree of operating leverage and the degree of financial leverage.
Firms with cyclical sales should employ a high degree of leverage.
If economic conditions were expected to be favourable, an investor would likely prefer a firm with a low degree of leverage.
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