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Answer:
Explanation:
Operating Leverage:Definition: Operating leverage refers to the extent to which a company's fixed costs are part of its overall cost structure.
Effect: A higher degree of operating leverage means a higher proportion of fixed costs in the total cost structure. This can lead to higher profitability during periods of increased sales or revenue but can also result in greater losses during downturns.
Financial Leverage: Definition: Financial leverage, also known as debt leverage, involves the use of debt (loans, bonds) to finance a company's operations and assets.
Effect: By using debt, a company can amplify its returns when its earnings are higher than the cost of debt. However, it also increases the risk because fixed interest payments must be made regardless of the company's financial performance. Excessive financial leverage can lead to financial distress if the company struggles to meet its debt obligations.
Combined Leverage: Definition: Combined leverage is the combination of operating leverage and financial leverage.
Effect: It measures the total risk and return associated with a company's operations and financing choices. A company with high combined leverage will experience more significant swings in profitability based on changes in sales or revenue.
Relation: A company with high operating leverage may experience significant fluctuations in profit with changes in sales.Financial leverage can further amplify these effects by introducing interest expenses and the need to service debt.Combined leverage reflects the joint impact of both operating and financial leverage on a company's overall risk and return.
