B2-M2 Capital Structure 2 Flashcards
1
Q
what is operating leverage?
A
a firm uses fixed operating costs as opposed to variable operating costs. A firm that has high operating leverage has high fixed operating costs and relatively low variable operating costs and uses this cost structure to magnify the financial results of each additional dollar in sales
2
Q
what is financial leverage?
A
a firm uses debt to finance the firm, not purely operating fixed costs.
3
Q
what causes financial leverage to increase?
A
financial leverage increases when debt-to-equity ratio increases
4
Q
what is contribution margin?
A
it equals sales less variable costs
