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knowledge bank -basic learning Leverage-1

Q1.Define operating leverage and the degree of operating leverage. How are the two related?

Q2.Define financial leverage and the degree of financial leverage. How are the two related?

Q3.Your friend suggests, “ Firms with high fixed operating costs show extremely dramatic fluctuations in operating profits for any given change in sales volume”. Do you agree? Why or why not?

Q4.In financial leverage, why not simply increase leverage as long as the firm is able to earn more on the employment of the funds thus provided than they cost? Would not the earnings per share increase?

Q5.The EBIT- EPS chart suggests that the higher the debt ratio, the higher are the earnings per share for any level of EBIT above the indifference point. Why firms do sometimes chose financing alternatives that do not maximise EPS?


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