Answers:
The combination of operating and financial leverage is
called combined leverage.
Operating leverage affects the firm’s operating profit EBIT and financial
leverage affects PAT or the EPS. These cause wide fluctuations in EPS. A
company having a high level of operating or financial leverage will find a
drastic change in its EPS even for a small change in sales volume. Companies
whose products are seasonal in nature have fluctuating EPS, but the amount of
changes in EPS due to leverages is more pronounced.
The combined effect is quite significant for the
earnings available to ordinary shareholders. Combined leverage is the product
of DOL and DFL.