Question

ect the degree of leverage that completes the following sentence. Thedegree of operating leverage (DOL) is the percentage change in EPS that results from a given percentage change in sales, and it equals the product of the degrees of operating and financial leverage. Expert Analysts Resources (EAR) has provided you with the following information about three companies you are currently evaluating: Praxis Corp. Three Waters Co. Axis Chemical Co. Degree of Operating Leverage (DOL) 2.0 3.0 3.0 Degree of Financial Leverage (DFL) 6.5 4.0 3.5 According to this information, which company would be considered the riskiest

Answer 1

Answer: Praxis Corp

Step-by-step explanation:

To know the company that would be considered the riskiest, we've to calculate the degree of total leverage for each firm and this will be:

Praxis Corp:

Degree of total leverage = Degree of operating leverage × Degree of financial leverage

= 2.0 × 6.5

= 13.0

Three Waters Co.

Degree of total leverage = Degree of operating leverage × Degree of financial leverage

= 3.0 × 4.0

= 12.0

Axis Chemical Co.

Degree of total leverage = Degree of operating leverage × Degree of financial leverage

= 3.0 × 3.5

= 10.5

Based on the calculation, since the degree of total leverage for Praxis Corp is the highest, it simply means that it's the riskiest.