Common characteristics of operating and financial leverage include:
A)both involve the substitution of fixed for variable cash outflows.
B)both are affected by a firm's investing decisions.
C)both are affected by a firm's financing decisions.
D)None of the above

Question

Quizplus · Accepted Answer

Both operating and financial leverage involve the substitution of fixed for variable cash outflows. Operating leverage refers to the use of fixed costs in a firm's operations, while financial leverage refers to the use of debt financing with fixed interest costs. Both types of leverage can increase a firm's profitability when sales are strong, but can also magnify losses when sales are weak. Investing decisions and financing decisions may also impact leverage, but the use of fixed costs is the primary characteristic they share.

Common Characteristics of Operating and Financial Leverage Include