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. Generally speaking, operating leverage involves dividing fixed costs against variable costs to measure how much profit is generated from each additional unit of 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. For example, firms in industries characterized by high fixed costs (such as manufacturing) tend to have greater operating leverages than those in industries characterized by low fixed cost structures (such as services). On the other hand, companies that rely heavily on debt financing will typically have higher financial leverages since there is more risk associated with borrowing large sums at once versus gradually investing equity 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.