32: Measures of Leverage Flashcards
1
Q
Use of fixed costs in a firm’s operations, measures operating vs financial fixed costs
A
leverage
2
Q
measures risk of fixed operating elements
A
business risk
3
Q
measures the percentage of a firm’s costs that are fixed (business risk),
A
Degree of operating leverage (DOL)
4
Q
Higher DOL = Higher _____ risk = more susceptible to _____ = _____ optimal debt ratio
A
The higher DOL= the higher business risk= the more susceptible to business cycle fluctuations
=lower optimal debt ratio
5
Q
the additional uncertainty about earnings caused by fixed operating costs
A
operating risk
6
Q
taking on fixed expenses in the form of interest payments
A
financial risk
7
Q
level of sales required to cover fixed operating costs only
A
breakeven quantity of sales; ignoring fixed financing costs (interest)
