How does operating leverage affect business risk?

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How does operating leverage affect business risk?

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How does operating leverage affect business risk?

Explanation & AnswerSolution by a verified expert

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Operating leverage is the extent to which operating costs are fixed.

Explanation

Business risk is a risk inherent in the firm's operations without considering the effects of debt. The level of business risk is related to the volatilities of operating earnings and if the firm maintains a higher fixed cost, the operating earnings will become more sensitive.

Verified Answer

Higher operating leverage leads to a higher business risk, assuming everything else is constant.

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