Using the degree of leverage concept in financial analysis: benefits and applications |

Key Benefits of Using the Degree of Leverage Concept in Financial Analysis |

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Question

Which of the following is a key benefit of using the degree of leverage concept in financial analysis?

Answers

A. It shows how a given change in leverage will affect sales.

B. None of these statements are correct.

C. It establishes the optimal capital structure for the firm.

D. It allows decision-makers a relatively clear assessment of the consequences of alternative actions.

E. All of these statements are correct.

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Explanations

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A. B. C. D. E.

The degree of leverage concept is useful primarily for the insights it provides regarding the joint effects of operating and financial leverage on EPS. DOL concepts provide alternatives to decision-makers, giving a better idea of the ramifications of alternative actions.

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