Question

Which of the following would be implied by a decrease in a company’s operating gearing ratio?...

Which of the following would be implied by a decrease in a company’s operating gearing ratio?

Select one:

a. The company is less profitable

b. The company is more risky

c. The company has a lower proportion of costs that are variable

d. The company has profits which are less sensitive to changes in sales volume

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Answer #1

Answer-

The correct Option is d. The company has profits which are less sensitive to changes in sales volume.

A company with low leverage has effects of fluctuations in sales volume impact profitability to a smaller degree.

The other Options are incorrect.

Option a is incorrect. The company may be more or less profitable depending in other factors.
Options b is incorrect. The company is less risky as decrease in operating gearing ratio decreases leverage.
Options c is incorrect. The company has lower proportion of costs that are fixed.

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