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CMA Intermediate · Financial Management and Business Data Analytics · Leverage Analyses and EBIT - EPS Analysis

Which statement about leverage is correct?

A firm with no fixed operating costs has a DOL of 1, because contribution equals EBIT and EBIT changes in the same proportion as sales. The other statements confuse financing and operating effects or wrongly add rather than multiply the leverages.

  1. AA firm with no fixed operating costs has a DOL of 1Correct
  2. BFinancial leverage arises from fixed operating costs
  3. COperating leverage measures the effect of interest on EPS
  4. DCombined leverage is the sum of DOL and DFL

Explanation

With no fixed operating costs, contribution equals EBIT, so DOL = 1. Financial leverage arises from fixed financing charges, not operating costs. Operating leverage concerns sales-to-EBIT, not interest. Combined leverage is the product, not the sum.

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