Choice over operating leverage depends on the technologies available to a company. Some companies have little control over their operating leverage. For example, airlines which have no substitute for airplanes and their associated support systems can only operate with a large investment in fixed assets that create fixed costs. Other companies have a significant degree of control over their operating leverage. Many manufacturing companies, for example, can choose to produce using automated equipment or piecework labor. By contrast, most firms have total control over their financial leverage through their choice of financing (the exception is small firms that have limited access to financial markets, hence limited financing alternatives). A company can increase its financial leverage by using debt financing and can avoid financial leverage through financing with equity.
Be the first to comment on "How much choice does a firm have over its operating leverage? Over its financial leverage?"