Question

According to a Chief Financial Officer of a listed company, she thinks that financial leverage is more effective than operating leverage in the real world as one can use financial derivatives to manage the risk accordingly. Do you agree with her? (Not more than 750 words)

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Answer 1

Yes i agree with her because

it was calculated after deducting all expenses and risks so it gives a exact position of company.

Its about capital structure of the firm.

OPERATING LEVERAGE

Operating leverage is an indication of how a company's costs are structured and is used to determine the break-even point for a company. The break-even point is where the revenue from sales covers both the fixed and variable costs of production

Operating leverage can help companies determine what their break-even point is for profitability. In other words, the point where the profit generated from sales covers both the fixed costs as well as the variable costs.

Financial leverage is a metric that shows how much a company uses debt to finance its operations. A company with a high level of leverage needs profits and revenue that are high enough to compensate for the additional debt they show on their balance sheet.

Investors look at a company's leverage because it is an indicator of the solvency of the company. Also, debt can help magnify earnings and earnings per share. However, there is a cost associated with leverage in the form of interest expense. When a company's revenues and profits are on the rise, leverage works well for a company and investors. However, when revenues or profits are pressured or falling, the debt and interest expense must still be paid and can become problematic if there is not enough revenue to meet debt and operational obligations.