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Unformatted text preview: Sheet1 Page 1 Week 2 Reading 3 Financial Management: Principles and Applications, 10e Chapter 15: Analysis and Impact of Leverage Analysis and Impact of Leverage Learning Objectives After reading this chapter, you should be able to 1. Understand the difference between business risk and financial risk. 2. Use the technique of break-even analysis in a variety of analytical settings. 3. Distinguish among the financial concepts of operating leverage, financial leverage, and combined leverage. 4. Calculate the firm. s degree of operating leverage, financial leverage, and combined leverage. 5. Explain why a firm with a high business risk exposure might logically choose to employ a low degree of financial leverage in 6. Understand how business risk and global sales impact the multinational firm. The 2001 annual report of Harley-Davidson, Inc., in a discussion on financial performance, points out that for 2001, the firm& In 1996, the Coca-Cola Company posted only a moderate sales increase of 2.9 percent over the level of reported sales for 1 Consider that in 1993, Phillips Petroleum saw its sales rise by only 3.2 percent, yet its net income rose by a whopping 35 pe Chapter Preview: Our work in earlier chapters allowed us to develop an understanding of how financial assets are valued in the marketplace. Dr The cost of capital provides a direct link between the formulation of the firm& s asset structure and its financial structure. This Figure 15-1 Cost of Capital as a Link between Firm$ s Asset Structure and Financial Structure This chapter examines tools that can be useful aids to the financial manager in determining the firm s proper financial structur As you work through this chapter, you will be reminded of several of the principles that form the basics of business financial m We know that sales fluctuations are not always in the positive direction. Over the 1992 to 1993 time frame, Chevron Corpora What is it about the nature of businesses that causes changes in sales revenues to translate into larger variations in net inco The annual report of Harley-Davidson, Inc., is easily accessed at www.reportgallery.com. This excellent site promotes itself as Business and Financial Risk Objective 1 In this chapter, we become more precise in assessing the causes of variability in the firm s expected revenue streams. It is u In studying capital-budgeting techniques, we referred to risk as the likely variability associated with expected revenue or inco Business risk refers to the relative dispersion (variability) in the firm s expected earnings before interest and taxes (EBIT).1F Figure 15-2 Subjective Probability Distribution of Next Year s EBIT The relative dispersion in the firm& s EBIT stream, measured here by its expected coefficient of variation, is the residual effe Table 15-1 Concept of Business Risk BUSINESS RISK ATTRIBUTE EXAMPLEa Sensitivity of the firm& s product demand to general economic conditions If GDP declines, does the firm& s sales level decline by a greater percentage?If GDP declines, does the firm& s sales level decline by a greater percentage?...
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This note was uploaded on 11/09/2010 for the course FINANCE FIN 370 taught by Professor Pauleckbart during the Spring '10 term at University of Phoenix.
- Spring '10