How does operating leverage affect business risk?
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How does operating leverage affect business risk? |
Answer and Explanation
Here is a tip:
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 d...
Here is a tip:
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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