Question

At a base sales level of​ $400,000, a firm has a degree of operating leverage of 2 and a degree of financial leverage of 1.5. The​ firm's degree of total leverage is​ ________.

Answer 1

The​ firm's degree of total leverage is​ 3

Step-by-step explanation:

Degree of operating leverage: It shows a relationship between percentage change in Earning before income and tax (EBIT) and percentage change in sales

Degree of financial leverage: It shows a relationship between percentage change in Earning per share (EPS) and percentage change in Earning before income and tax (EBIT) .

Degree of combined leverage or total leverage : It is a multiply of Degree of operating leverage × degree of financial leverage

For computing the degree of total leverage, the following formula is used which is shown below:

= Degree of Total leverage = degree of operating leverage × degree o financial leverage

= 2 × 1.5

= 3

The degree of total leverage is also known as degree of combined leverage

Hence, The​ firm's degree of total leverage is​ 3