If Company a Has a Higher Degree of Operating Leverage

question 125

Multiple Choice

If company A has a higher degree of operating leverage than company B,then which of the following statements is true?

• A) Company A has higher variable expenses.
• B) Company A's profits are more sensitive to percentage changes in sales.
• C) Company A is more profitable.
• D) Company A is less risky.

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Definitions:

Common Stockholders' Equity

Represents the equity invested by common shareholders, along with retained earnings or losses.

Retained Earnings

The portion of net income not distributed as dividends but retained by the company to reinvest in its core business or to pay debt.

Stock Split

A corporate action where a company divides its existing shares into multiple shares to boost the liquidity of the shares, though the overall market capitalization remains the same.

Pre-split Price

Refers to the stock price of a company before it undergoes a stock split, a process that increases the number of shares while reducing the price per share without affecting the company's overall market capitalization.