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A firm has high Operating Leverage but Low Financial Leverage. This signals:
AHigh business risk but low financial risk
BLow business risk
CHigh financial risk
DNo risk
Answer & Solution
Correct answer: A. High business risk but low financial risk
1. High DOL = high business risk (fixed operating costs).
2. Low DFL = low financial risk (low debt/preference).
3. Common in capital-intensive but lightly-leveraged firms.
_Source: ICAI BoS CA Inter Paper 6A, Ch 6 "Financing Decisions — Leverages", §3 and §4_
Related questions
Combined Leverage equals 1 only when:Combined Leverage of 2.5 and 4% increase in sales will change EPS by approximately:Sales ₹20 lakh; VC ₹12 lakh; Fixed Cost ₹4 lakh; Interest ₹2 lakh. DCL is:A company has DOL = 2 and DFL = 1.5. Combined Leverage is:Combined (Total) Leverage measures the relationship between: