Question

Epitome Analysts Resources (EAR) has provided the following information about three companies: Company Degree of Operating Leverage (DOL). Degree of Financial Leverage (DFL). Acme 1.5% 6.0x Apex 3.0x 4.0x Alps 5.0x 2.0x Which company would be considered riskiest? Why? Alps is the riskiest because it has the highest DOL among the three firms. a. Acme is the riskiest because its DFL = 6.0, which is the highest leverage associated with any of the three firms. Apex is the riskiest because it has the highest degree of total leverage (DTL) among the three firms. C.

Answer 1

The degree of total leverage is computed as shown below:

= DOL x DFL

DTL of Acme is computed as follows:

= 1.5 x 6

= 9

DTL of Apex is computed as follows:

= 3 x 4

= 12

DTL of Alps is computed as follows:

= 5 x 2

= 10

So, the correct answer is option of Apex is the riskiest since it has the highest DTL among all the three firms.

Feel free to ask in case of any query relating to this question