If a firm's production process requires high operating leverage (use of fixed costs),then the firm should finance its assets with debt,so that the cost of capital will be reduced and financing costs will remain fixed.

Question

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High operating leverage means a firm has high fixed costs relative to its variable costs, making its earnings more sensitive to changes in sales volume. Financing with debt adds fixed financial obligations (interest payments), increasing the firm's financial leverage and risk. This doesn't necessarily reduce the cost of capital and can make the firm's earnings more volatile.

If a Firm's Production Process Requires High Operating Leverage (Use