The correct answer is: A. EBIT and EPS.
Combined leverage is a measure of the combined effect of operating leverage and financial leverage on earnings per share (EPS). It is calculated by multiplying operating leverage by financial leverage.
Operating leverage is a measure of how sensitive a company’s earnings are to changes in sales. It is calculated by dividing EBIT by sales.
Financial leverage is a measure of how sensitive a company’s earnings are to changes in its interest expense. It is calculated by dividing debt by equity.
A high combined leverage ratio indicates that a company is highly sensitive to changes in sales and interest rates. This means that even small changes in sales or interest rates can have a large impact on the company’s EPS.
A low combined leverage ratio indicates that a company is not very sensitive to changes in sales and interest rates. This means that even large changes in sales or interest rates will not have a large impact on the company’s EPS.
Here is a brief explanation of each option:
- Option A: EBIT and EPS. EBIT is earnings before interest and taxes, and EPS is earnings per share. Combined leverage is a measure of the combined effect of operating leverage and financial leverage on EPS. Therefore, option A is the correct answer.
- Option B: PAT and EPS. PAT is profit after tax, and EPS is earnings per share. Combined leverage is not a measure of the relationship between PAT and EPS. Therefore, option B is not the correct answer.
- Option C: Sales and EPS. Sales is a measure of a company’s revenue, and EPS is earnings per share. Combined leverage is not a measure of the relationship between sales and EPS. Therefore, option C is not the correct answer.
- Option D: Sales and EBIT. Sales is a measure of a company’s revenue, and EBIT is earnings before interest and taxes. Combined leverage is a measure of the combined effect of operating leverage and financial leverage on EBIT. Therefore, option D is not the correct answer.