Final answer:
The correct choice is C. DOL equals 1, and DFL equals 1, as these values correspond to the lowest possible degrees of operating and financial leverage, reflecting minimal risk and stable income relative to sales volume and debt levels.
Step-by-step explanation:
If a firm has the lowest possible degree of operating leverage (DOL) and the lowest possible degree of financial leverage (DFL), then the correct choice would be C. DOL equals 1, and DFL equals 1. The degree of operating leverage measures the sensitivity of a company's operating income to changes in its sales volume. When DOL is low, it implies a lower level of fixed costs relative to variable costs. A DOL of 1 indicates that operating income will change in direct proportion to sales volume, signifying the lowest possible leverage from an operating standpoint.
On the other hand, the degree of financial leverage is concerned with the impact of debt on a company's earnings per share (EPS). When DFL is low, it indicates that a company has a small amount of debt relative to equity. A DFL of 1 means that EPS will change in direct proportion to the company's earnings before interest and taxes (EBIT), representing the lowest possible risk from financial leverage. Therefore, having both the lowest DOL and DFL means that the company's income is relatively stableconcerningo both sales volume and debt.