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Financial leverage and operating leverage

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Explain in your own words why you might expect to observe a negative correlation between financial leverage and operating leverage.

about 200 words

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Solution Summary

The solution explains why there may be negative correlation between operating leverage and financial leverage.

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Negative correlation implies that if operating leverage is high, the financial leverage would be low. The reason for negative correlation is reduction of risk.
Use of leverage increases risk. Operating leverage refers to the use of fixed costs in operating costs and financial leverage refers to the use of fixed costs in the form of interest in ...

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