#37 Measures of Leverage Flashcards
what does leverage mean in corp finance?
“amt of fixed costs a firm has”
define business risk
“risk associated with firm’s operating income and is result of uncertainty about a firm’s revenues and the expenditures necessary to produce those revenues”
define sales risk
“uncertainty about firms’ sales”
define operate risk
“refers to additional uncertainty about op earning caused by fixed opp costs”
define financial risk
“refers to additional risk that firm’s common stockholders must bear when a firm uses fixed cost (debt) financing”
define degree of operating leverage DOL
%chnge in op income (EBIT) that results from given %change in sales
FORMULA: DOL
Q(P-V) / Q(P-V)-F or S - TVC/ S-TVC - F
is DOL higher at lower level of sales or at higher?
at lower levels because higher sales increases the denominator
define degree of financial leverage DFL
%change NI (EPS)/ %chng EBIT (op income)
FORMULA: DFL
EBIT / EBIT - interest
define degree of total leverage (DTL)
DOL X DFL, %chng in EPS (NI) / % chng in Sales
define contribution margin
price - variable cost per unit
define break-even quantity of sales
“quantity of sales for which revenues = total costs”
FORMULA: Qbreakeven
Q(BE) = fixed op costs + fixed financing costs / (price - variable cost per unit). denominator = contribution margin
difference between operating break-even of sales and just break-even quant of sales
operating break-even does not consider fixed financing costs
