Question

Please explain in 3 paragraphs

What is the difference between operating leverage and financial leverage?

Answer 1

Answer:- The difference between operating leverage and financial leverage is given below:-

Operating leverage	Financial leverage
1. Operating leverage measures the fixed costs of the company to generate more and better results	1. Financial leverage measures the capital structure of the company to increase return and reduce cost and taxes.
2. Operating leverage deals with investment activities of a company	2. Financial leverage deals with the financial activities of a company.
3. Because of its fixed operational cost able to show the change in EBIT due to the change in the company’s sales	3. Because of its fixed interest cost, it is able to show changes in EPS due to the change in EBIT.
4. Higher the operating leverage indicates a higher operating risk of a company	4. Higher financial leverage Indicate the financial risk of a company
5. It is calculated by DOL = contribution/EBIT	5. It is calculated as DFL = EBIT/EBT
6. Low preferences	6. Higher preferences.

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