Question

If a firm has the lowest possible degree of operating leverage and the lowest possible degree of financial leverage, then:

A. DOL equals 1, and DFL equals 0.
B. DOL equals 0, and DFL equals 1.
C. DOL equals 1, and DFL equals 1.
D. None of the options

Answer 1

If a firm has the lowest possible degree of operating leverage and the lowest possible degree of financial leverage, then DOL equals 1, and DFL equals 1.

Step-by-step explanation:

The lowest possible degree of operating leverage (DOL) and the lowest possible degree of financial leverage (DFL) indicate that the firm is not using any debt or fixed costs in its operations.

When DOL equals 1, it means that a change in sales will result in an equal change in operating income. When DFL equals 1, it means that a change in operating income will result in an equal change in net income.

Therefore, if a firm has the lowest possible degree of operating leverage and financial leverage, DOL would be 1 and DFL would be 1, which means the correct option is C. DOL equals 1, and DFL equals 1.