Finance Module 2

Finance Module 2 - Discussion-#2 Ryan Helms Operating...

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Discussion--#2 Ryan Helms Operating Leverage is a measurement of degree to which a firm or project incurs a combination of fixed and variable costs. This occurs when a company has fixed costs that must be met regardless of sales volume. So if FCS has invested $10 million into development and marketing for its latest application program, which sells for $45 per copy. Each copy costs the company $5 to sell. Sales volume reaches one million copies. So if the company FCS enjoys a Degree of Operating Leverage of 1.33. This 25% change in sales volume would produce a 1.33 x 25% = 33% change in operating profit. Financial Leverage —is the degree to which an investor or business is utilizing borrowed money. Companies that are highly leveraged may be at risk or bankruptcy if they are unable to make payments on their debt. Financial leverage is not always bad and may even increase the shareholders return on their investment and even may have tax advantages from borrowing. Example of Computing -- impact on owners’ rate of return will be as a result of borrowing a
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This note was uploaded on 10/20/2010 for the course REL 325 taught by Professor K during the Spring '10 term at St. Leo.

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Finance Module 2 - Discussion-#2 Ryan Helms Operating...

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