The correct answer is: C. Multiplication
Combined leverage is a measure of the combined effect of operating leverage and financial leverage on the earnings per share (EPS) of a company. It is calculated by multiplying the operating leverage (OL) and the financial leverage (FL).
Operating leverage is a measure of how sensitive a company’s earnings are to changes in its sales. A company with high operating leverage has a high proportion of fixed costs in its cost structure. This means that a small change in sales can lead to a large change in earnings.
Financial leverage is a measure of how sensitive a company’s earnings are to changes in its interest expense. A company with high financial leverage has a high proportion of debt in its capital structure. This means that a small change in interest rates can lead to a large change in earnings.
Combined leverage is important because it can help investors to understand the risk of investing in a company. A company with high combined leverage is more risky than a company with low combined leverage. This is because a small change in sales or interest rates can lead to a large change in earnings.
Here is a brief explanation of each option:
A. Addition: This is not the correct answer because combined leverage is not obtained from OL and FL by their addition.
B. Subtraction: This is not the correct answer because combined leverage is not obtained from OL and FL by their subtraction.
C. Multiplication: This is the correct answer because combined leverage is obtained from OL and FL by their multiplication.
D. Any of these: This is not the correct answer because combined leverage is not obtained from OL and FL by any of these.