What do you think is the relationship between a firm’s operating leverage and its financial leverage? Do you think the two measures are positively correlated, negatively correlated, or unrelated?

The relationship between a firm’s operating leverage and its financial leverage depends on the nature of the industry in which it operates, as well as its chosen strategies. Operating leverage is calculated by dividing the fixed costs and variable costs in order to determine how much profits are generated for each unit of additional sales. Financial leverage, on the other hand, is determined by taking into account all of a firm’s long-term debts and liabilities relative to their total assets or equity capital.

Financial leverage can be either positive or negative for a company’s operations based on their strategy; if they borrow money with the intention of using it towards investments that generate higher returns than what was borrowed (i.e., debt financing), then this would be considered having positive financial leverage while conversely if they borrow funds only to cover operational costs (i.e., equity financing) then this would be considered having negative financial leverage.

Since both measures have different objectives and determine profitability differently, there is no clear-cut correlation between them—rather their relationship will vary depending on how they are used within an organization’s plan and overall strategy. As an example, companies in industries with high fixed costs like manufacturing tend to operate at a higher leverage than businesses in industries that have low fixed costs. Companies that heavily rely on debt will have higher financial leverages, as there are more risks associated with large amounts of money borrowed at one time versus investing in equity gradually over time.

Ultimately, determining whether these two measures are positively correlated or negatively correlated depends upon an individual firm’s unique situation; every business has different goals when pursuing different types of leverages so it really comes down to how each measure contributes towards achieving those goals efficiently and effectively.