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Unformatted text preview: times the quantity sold, and variable costs equal cost times the quantity produced. If the profit margin and working capital (particularly accounts receivable) do not change from period to period, . Therefore: Operating Leverage and Beta 1 where in the last step follows from Equation (1) above. Therefore: (2) The quantity is known as the operating leverage. It also follows that , and the extent to which the inequality holds depends on the operating leverage. The equation above suggests that we can estimate beta of the assets when we have information on the systematic risk of the firms revenues as measured by the beta of its revenues, or, in other words, information on how the changes in revenue move together with changes in the market....
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- Summer '07