Coroporate Finance: Leverage

Question 1

Break even point

Answer 1

The number of observations hits produced and sold at which the companies net income is 0.

Question 2

Business risk

Answer 2

The risk associated with operating earnings, operating earnings are uncertain bedside total revenues and many of the expenditures contributed to produce those revenues are uncertain

Question 3

Contribution margin

Answer 3

The amount available for costs and profit after paying for variable costs

Question 4

Cost structure

Answer 4

The mix of a companies variable costs and fixed costs

Question 5

Degree of Financial Leverage

Answer 5

The ratio of the % change in net income to the percentage change in operating income; the sensitivity of the cash flows avail to to owners when operating income changes

Question 6

Degree of operating leverage

Answer 6

The ratio of the % change in operating income to the % change in units sold; the sensitivity of operating income to changes in units sold

Question 7

Degree of total leverage

Answer 7

The rate of the percentage change in net income to the percentage change in units sold; the sensitivity of the cash flows to owners to changes in the number of units produced and sold

Question 8

Elasticity

Answer 8

The percentage change in one variable for a percentage change in another variable; a general measure of how sensitive one variable is to change in the value of another variable

Question 9

Financial risk

Answer 9

The risk that environmental, social or governance risk factors will result in significant costs or other losses to a company and its shareholders; the risk arising from a company’s obligation to meet required payments under its financing agreements

Question 10

Fixed costs

Answer 10

Costs that remain at the same level regardless of a company’s level of production and sales

Question 11

Leverage

Answer 11

In the context of corporate finance , leverage refers to the use of fixed costs within a company’s cost structure. Fixed costs that are operating costs (such as depreciation or rent) create operating leverage. fixed costs that are financial costs (such as interest expense) create financial leverage

Question 12

Liquidation

Answer 12

To sell the assets of a company division, or subsidiary piecemeal, typically because of bankruptcy

Question 13

Operating risk

Answer 13

Risk associated to operating cost structure m; in particular the use of fixed costs in operations

Question 14

Per unit contribution margin

Answer 14

The amount that each unit sold contributes to fixed costs

Question 15

Reorganization

Answer 15

Agreements made by a company in bankruptcy under which a companies capital structure is altered and/or alternative arrangements are made for debt repayments; ch 11

Question 16

Sales risk

Answer 16

Uncertainty with respect to the quantity of goods and service LSU that a company is able to sell and the price it is able to achieve.