Question

Combined leverage is calculated as ______________.

• A. Operating Leverage + Financial Leverage
• B. Operating Leverage - Financial Leverage
• C. Operating Leverage X Financial Leverage
• D. Operating Leverage/ Financial Leverage

Answer 1

Answer: (C)

Operating Leverage X Financial Leverage

Combined leverage is a leverage which refers to high profits due to fixed costs. It includes fixed operating expenses with fixed financial expenses. It indicates leverage benefits and risks which are in fixed quantity. Competitive firms choose high level of degree of combined leverage whereas conservative firms choose lower level of degree of combined leverage. Degree of combined leverage indicates benefits and risks involved in this particular leverage.

Degree of combined leverage = Degree of operating leverage * Degree of financial leverage.