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Unformatted text preview: H AAS S CHOOL OF B USINESS UGBA 103 U NIVERSITY OF C ALIFORNIA AT B ERKELEY A VINASH V ERMA O PERATING L EVERAGE AND THE S YSTEMAT IC R ISK Let us denote periodic (typically annual) cash flows that the firm projects as CFs , (periodic) Revenues as R % , (periodic) Fixed Costs as F % , and (periodic) variable costs as V % . Now, in every period in the future cash flows are revenues less fixed and variable costs. Therefore, we can say that: ( 29 ( 29 ( 29 (Assets) ( ) A V PV CFs PV R PV V PV F = = % % % % (1) Based on this observation, we can think of the assets, A % , as a portfolio in which a fraction ( 29 / PV R A % % has been invested in the Revenues, a fraction ( 29 / PV V A % % has been invested in the variable costs, and a fraction ( 29 / PV F A % % has been invested in the fixed costs. Now, because beta of a portfolio is a sum of the beta of the constituents of the portfolio weighted with the fraction invested in each constituent: 1 1 2 2 ( ) ( ) ( ) ......
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This note was uploaded on 04/30/2010 for the course L&S 101 taught by Professor Chow during the Spring '10 term at Berkeley.
 Spring '10
 CHOW

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