Combined leverage can be used to measure the relationship between?

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This question was previously asked in

UGC Paper 2: Commerce 22nd Dec 2018

Answer 1

James Horne has defined leverage as, "the employment of an asset or fund for which the firm pays a fixed cost or fixed return."

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The Degree of Combined Leverage (DCL) is the leverage ratio that sums up the combined effect of the Degree of Operating Leverage (DOL) and the Degree of Financial Leverage (DFL) has on the Earning per share or EPS or given a particular change in shares.
This ratio helps in ascertaining the best possible financial and operational leverage that is to be used in any firm or business.
Since the degree of combined leverage is calculated by combining both the operational leverage and financial leverage, it helps us in ascertaining the total risk involved in the business.
The degree of combined leverage (DCL) is the ratio of the percentage change in earnings per share to the percentage change in sales. It indicates the effect the sales changes will have on EPS.

Thus, option 2 is the correct answer.

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