Q #01: Define Operating Leverage, Financial leverage and degree of total leverage? What is the relationship among these?

Ans.

Operating Leverage : It measures the firms capacity to increase its operating income by increasing its sales revenue. This is high when variable cost is low and fixed cost is high and vice-a-versa.

Financial Leverage : It refers to use of borrowed money or debt to purchase additional assets.

Degree of Total Leverage : It is the ratio of percentage change in earnings per share of firm  to percentage change in its revenue from sales.

Relationship:

Combined Leverage = Operating Leverage * Financial Leverage