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Author Question: How do operating and financial leverage interact to affect the volatility of a firm's earnings per ... (Read 128 times)

saraeharris

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on: Jul 10, 2018
How do operating and financial leverage interact to affect the volatility of a firm's earnings per share?
 
  What will be an ideal response?

Question 2

With regard to the hedging principle, which of the following assets should be financed with current
  liabilities?
 
  A) minimum level of cash required for year round operations
  B) expansion of accounts receivable to meet seasonal demand
  C) buildings
  D) machinery
Foundations of Finance ¦ Keown, Petty, Martin ¦ 9th Edition
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aloop

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Reply #1 on: Jul 10, 2018
Answer to Question 1

Operating leverage causes changes in sales revenues to lead to even greater changes in EBIT. Additionally, changes in
EBIT due to financial leverage translate into larger variations in both earnings per share (EPS) and the net income
available to the common shareholders (NI), if the firm chooses to use financial leverage. It should be no surprise, then,
to find out that combining operating and financial leverage (combined, or total, leverage), causes rather large
variations in earnings per share.

Answer to Question 2

B


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