Question

True or False: All other things being equal, firms exhibiting high degrees of operating leverage exhibit lower levels of business risk. This statement is: True False

Answer 1

Answer: False

Explanation:

Operating Leverage is used to measure how much a change in sales translates to a change in income. In general, a higher operating leverage means that a small change in sales leads to a higher change in income. This is quite risky because it shows that even a small error when forecasting sales can lead to a larger error in the cash flow that will be expected from the sales. This makes forecasting harder and increases business risk.