Final answer:
The degree of combined leverage is the sum of the degree of operating leverage and the degree of financial leverage. This statement is True.
Step-by-step explanation:
The degree of combined leverage is the sum of the degree of operating leverage and the degree of financial leverage. This statement is True.
Degree of operating leverage measures the sensitivity of operating income to changes in sales, while degree of financial leverage measures the sensitivity of net income to changes in operating income. When these two leverages are combined, it provides a measure of the overall risk and return in a company's capital structure.
For example, if a company has a high degree of operating leverage, it means that a small change in sales will result in a large change in operating income. Similarly, if a company has a high degree of financial leverage, it means that a small change in operating income will result in a large change in net income.