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 before interest and taxes (EBIT) are to changes in sales. A company with high operating leverage has a high fixed cost structure, which means that its EBIT will be more sensitive to changes in sales.
Financial leverage is a measure of how sensitive a company’s EPS are to changes in EBIT. A company with high financial leverage has a high debt-to-equity ratio, which means that its EPS will be more sensitive to changes in EBIT.
Combined leverage is important because it can help companies to understand how their earnings will be affected by changes in sales. A company with high combined leverage will be more sensitive to changes in sales than a company with low combined leverage. This means that a company with high combined leverage should be more careful about managing its sales, as even a small change in sales can have a large impact on its earnings.
Here is a brief explanation of each option:
- Option A: EBIT and EPS. EBIT is a measure of a company’s profitability before interest and taxes. EPS is a measure of a company’s profitability 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: Sales and EPS. Sales is a measure of a company’s revenue. EPS is a measure of a company’s profitability per share. Combined leverage is a measure of the combined effect of operating leverage and financial leverage on EPS. Therefore, option B is not the correct answer.
- Option C: Sales and EBIT. Sales is a measure of a company’s revenue. EBIT is a measure of a company’s profitability before interest and taxes. Combined leverage is a measure of the combined effect of operating leverage and financial leverage on EPS. Therefore, option C is not the correct answer.
- Option D: PAT and EPS. PAT is a measure of a company’s profit after tax. EPS is a measure of a company’s profitability per share. Combined leverage is a measure of the combined effect of operating leverage and financial leverage on EPS. Therefore, option D is not the correct answer.