One factor that can affect the market risk of a project is its degree of operating leverage,which is:
A)the relative proportion of operating assets versus non-operating assets.
B)the relative proportion of operating assets versus equity.
C)the relative proportion of operating expenses versus non-operating expenses.
D)the relative proportion of fixed versus variable costs.

Question

Quizplus · Accepted Answer

Degree of operating leverage refers to the proportion of fixed costs to variable costs in a company's cost structure. A project with a higher proportion of fixed costs will have a higher degree of operating leverage, which increases the market risk of the project as changes in sales or revenue will have a greater impact on the company's profitability. Therefore, option D, the relative proportion of fixed versus variable costs, is the best answer.

One Factor That Can Affect the Market Risk of a Project