Certified Management Accountant Practice Exam

An increase in a stock's beta is primarily associated with increased operating leverage. Operating leverage refers to the degree to which a company utilizes fixed costs in its operations. When a company has higher operating leverage, it means that a larger proportion of its costs are fixed, as opposed to variable. This can lead to greater volatility in earnings; as sales increase, profits can rise significantly due to these fixed costs not changing proportionally. Conversely, if sales drop, losses can accumulate quickly since the fixed costs still need to be covered.

Higher operating leverage means that a company's financial performance is more sensitive to changes in sales volume, leading to larger fluctuations in stock price and, consequently, an increased beta. Beta measures the sensitivity of a stock's returns relative to fluctuations in the overall market, and higher operating leverage amplifies this sensitivity.

The other options, while they relate to company performance or structure, do not directly contribute to an increase in beta in the same way. Lowering the debt to equity ratio typically reduces financial risk, which can lower beta. Buffers in fixed costs, if anything, might stabilize earnings rather than increase volatility, and a decrease in fixed assets would likely reduce operating leverage rather than increase it. Thus, increased operating leverage is the correct choice for