Multiple choice

Match the following:

 
List - I
List - Il
(a) The presence of fixed cost in the cost structure of a firm.
1.Super-leverage
(b) The presence of fixed return funds in the capital structure of a firm.
2.Operating leverage
(c) Impact of changes in sales on the earnings available to shareholders.
3. Financial leverage

  1. (a)-(1), (b)-(2), (c)-(3)

  2. (a)-(2), (b)-(3), (c)-(1)

  3. (a)-(3), (b)-(2), (c)-(1)

  4. (a)-(1), (b)-(3), (c)-(2)

Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Operating leverage (2) refers to the presence of fixed costs in the cost structure - fixed operating costs amplify the impact of sales changes on operating income. Financial leverage (3) relates to fixed return funds (debt) in capital structure. Super-leverage (1) or combined leverage captures the total impact of sales changes on shareholder earnings by combining both operating and financial leverage effects.

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