Linda de la Fleur currently works as a financial analyst for Ingliston Transport Ltd. (ITL). ITL is a trucking company that transports freight across Canada. The company primarily transports fresh and frozen foods for food producers and grocery stores. ITL has longterm contracts with its customers, and its revenues have been stable over the past five years. The company owns and operates its own fleet of tractors and trailers that are used to haul the freight and employs its drivers on a full-time basis. Profits have been unpredictable due to volatile fuel costs.

Linda is currently reviewing ITLs capital structure to determine if it is optimal. As a first step in this analysis, she has to assess the volatility of ITLs operating cash flows.

Required: Explain why understanding the volatility of operating cash flows is important in the review of ITLs capital structure and how Linda mightassess ITLs business and operating risks. Also discuss what operating leverage is and why it is important to understand when determining optimal capital structure.