Financial leverage involves substituting debt for equity in the firm's capital structure, operating leverage involves:
A)substituting variable costs for fixed costs in the firm's cost structure.
B)substituting fixed costs for variable costs in the firm's cost structure.
C)increasing financial risk.
D)None of the above

Question

Quizplus · Accepted Answer

Operating leverage involves substituting fixed costs for variable costs in the firm's cost structure. This can lead to higher profits when sales increase, but can also lead to higher losses when sales decrease. It is not related to financial risk or substituting variable costs for fixed costs.

Financial Leverage Involves Substituting Debt for Equity in the Firm's