The Degree of Operating Leverage for ABC Inc

question 82

Multiple Choice

The degree of operating leverage for ABC Inc.is 3.5,and the degree of operating leverage for XYZ Corporation is 7.0.According to this information,which firm is considered to have greater business risk?

• A) ABC Inc.
• B) XYZ Corporation.
• C) The degree of operating leverage is not a measure of business risk,so it is not possible to tell which firm has the greater business risk given the above information.
• D) To determine which firm has the greater business risk,we need to know the operating income (NOI or EBIT)of each firm.XYZ Corporation would have less business risk if its operating income is at least twice that of ABC Inc.
• E) None of the above is a correct answer.

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Definitions:

Price-taker Industry

An industry in which individual firms have no control over the price of their product and must accept the market price set by the forces of supply and demand.

Price-taker Industry

An industry in which individual firms have no control over the price of their product; they "take" the market price as given.

Long-run Equilibrium

A state in which all factors of production and costs are variable, and firms no longer have any incentives to enter or exit the market, resulting in an optimal allocation of resources.