Because the Degree of Total Leverage Is Multiplicative and Not

question 48

Multiple Choice

Because the degree of total leverage is multiplicative and not additive, when a firm has very high operating leverage it can moderate its total risk by ________.

• A) increasing sales
• B) using a higher level of financial leverage
• C) increasing EBIT
• D) using a lower level of financial leverage

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Definitions:

Payback Period

The duration of time it takes to recover the cost of an investment, calculated as the point where net cash flow equals the initial investment.

Initial Cost

The initial expense associated with the purchase or investment in an asset before operational costs are considered.

Future Cash Inflows

Predicted incoming money to a company or project from operations, investments, or financing activities in the future.

Gelled Electrolyte

A semi-solid form of electrolyte used in batteries, typically to prevent leakage and improve performance and safety.