Question

If a firm has the lowest possible degree of operating leverage and the lowest possible degree of financial leverage, then

• DOL equals 1, and DFL equals 0.

• DOL equals 0, and DFL equals 1.

• DOL equals 1, and DFL equals 1.

• None of the options

Answer 1

HI

Degree of financial leverage = EBIT/(EBIT-interest)

That means lowest DFL when interest =0

so lowest DFL = 1

Degree of operating leverage = (sales-var. cost)/(sales-var cost-fixed cost)

Degree of operating leverage is lowest when fixed cost =0

So lowest DOL also can be 1

Hence 3rd option is correct here.

THanks