Question

1. Which of the following statements is true about operating leverage of a firm?

1. It is the portion of stockholders' risk, over and above basic business risk.
2. It refers to the extent to which fixed-income securities (debt and preferred stock) are used in a firm's capital structure.
3. It refers to the presence of fixed operating costs that do not change when the level of sales changes.
4. It is the ability to borrow money at a reasonable cost when good investment opportunities arise.

Answer 1

A company with high operating leverage must pay off it's fixed cost, even without any kind of revenue generation so the level of fixed cost remains same at each level of operation.

All other statement except option( C)are false because operating leverage doesn't mean shareholders risk, or it doesn't mean the capital structure or ability to borrow money.

Hence the correct answer is option ( C)refers to the presence of fixed operating costs that do not change when the level of sales changes.