If a firm has the lowest possible degree of operating leverage and the lowest possible degree of financial leverage, then
A) DOL equals 1, and DFL equals 0.
B) DOL equals 0, and DFL equals 1.
C) DOL equals 1, and DFL equals 1.
D) None of the options

Question

Quizplus · Accepted Answer

The lowest possible degree of operating leverage (DOL) is 1, indicating that operating income changes one-for-one with sales, showing no leverage effect. The lowest possible degree of financial leverage (DFL) is also 1, indicating that earnings per share (EPS) change one-for-one with operating income, again showing no leverage effect.

If a Firm Has the Lowest Possible Degree of Operating