Why does a conservative approach to operating leverage inhibit a firm’s profitability? Be sure to directly and succinctly answer the question. Your answer should, at a minimum, explain the concept of operating leverage and mention the roles of contribution margin and breakeven point.
- What types of firms or what industry sectors might it be prudent to limit operating leverage? Why?
- Why would a firm ever issue stock or find external sources of equity if it has the opportunity to leverage with debt (i.e. use financial leverage)?
- Explore leverage as it related to the financial crisis of 2008/2009 and share what you learned.
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