Is the Degree of Financial Leverage Affected by the Degree of Operating Leverage?
Yes, since both types of leverage tend to increase the risk of the company. Therefore, you would normally like to “trade off” the risk of one against the other. The total leverage of the company is the product of operating leverage and financial leverage, i.e., Total Leverage = Operating Leverage * Financial Leverage Of these three, the desired levels are determined in the order of left to right above: total leverage first, operating leverage next, and financial leverage last.
