Week 16 Flashcards
referred as the degree of debts in the financing or capital of a business firm
CAPITAL STRUCTURE
refers to a systematic approach to financing business
activities through a combination of equities and liabilities.
CAPITAL STRUCTURE THEORY
is the amount of debt that an entity uses to buy more assets.
FINANCIAL LEVERAGE
Financial leverage has two primary advantages
Enhanced earnings.
Favorable tax treatment.
Financial leverage may allow an entity to
earn a disproportionate amount on its assets
Enhanced earnings
In many tax jurisdictions, interest
expense is tax deductible, which reduces its net cost to the
borrower.
Favorable tax treatment.
Financial leverage formula
Total debt/share holders equity
is a measurement of the degree to which a firm or project
incurs a combination of fixed and variable costs.
OPERATING LEVERAGE
A business that makes more sales, with each sale providing a very high gross margin, is
said to be highly leveraged. TRUE OR FALSE
FALSE
A business that makes many sales, with each sale
contributing a very slight margin is said to be less leveraged. TRUE OR FALSE
TRUE
A business that has a less proportion of fixed costs and a lower proportion of variable costs is said to have used more operating leverage. TRUE OR FALSE
FALSE
Those businesses with lower fixed costs and higher
variable costs are said to employ less operating leverage. TRUE OR FALSE
TRUE
It consists of the equity and debt capital.
Capital Mix
preference either for payment of interest or payment of dividends
Terms and Conditions
the most important consideration in the selection of the appropriate currency in which such
international loans are granted and accepted is the exchange risk factor.
Selection of Currency of the Debt