# Chapter_16_and_17_Qu - Chapter 16 and 17 Notes Questions and Answers 1 Chapter 16 1.1 Leverage Degree of operating leverage(DOL Degree of Financing

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Chapter 16 and 17 Notes, Questions, and Answers 1 Chapter 16 1.1 Leverage Degree of operating leverage (DOL) Degree of Financing leverage (DFL) Degree of total leverage (DTL) 1.1.1 operating leverage DOL = [ Q ( P - V )] [ Q ( P - V ) - F ] (1) 1.1.2 ﬁnancial leverage DFL = [ Q ( P - V ) F ] [ Q ( P - V ) - F - C ] (2) 1.1.3 Total Leverage DTL = [ Q ( P - V )] [ Q ( P - V ) - F - C ] (3) 1.1.4 Break even Point Q = F + C P - V (4) 1

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Table 1: Summary Ratio Meaning DOL How units sold leads to change in operating income. DFL How operating income leads to change in net income. DTL How units sold leads to change in net income. Break even Number of units sold needed to break even. 1.2 MMI When there are no taxes and capital markets function well, the market value of a company does not depend on its capital structure. 1.3 MMII The net eﬀect of the increasing debt means the cost of equity rises. r e = r a + ( r a - r d ) D E (5) 1.4 Taxes The tax shield is the present value of tax savings. The annual savings= rd*td PV(tax saving) = r d * td r d = td VL = VU + td 2
2 Chapter 17 Notes The company has three choices. Reinvest the earnings in the business. Pay earnings out to the shareholders in the form of dividends. It could repurchase outstanding shares. 2.1 Forms of Dividends 1. Regular dividends 2. DRIPs 3. Stock Dividends 4. stock split 5. Share repurchase 2.2 Dividend Time line 1. Declaration date 2. ex dividend 3. record date 4. payment date 2.3 Factors Aﬀecting Dividends 1. Taxation 2. Clientele Eﬀect 3. Signaling eﬀect 3

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1. Residual dividend approach 2. Stable 3. Target payout 4. Share repurchase 2.5 Do dividends Matter 1. They are irrelevant. 2. Second schools says that dividends do matter since investors like them. 3. Do matter, but a company’s high payout will lead to a lower share price. 4
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## This note was uploaded on 10/25/2011 for the course FIN 351 taught by Professor Li during the Spring '09 term at S.F. State.

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Chapter_16_and_17_Qu - Chapter 16 and 17 Notes Questions and Answers 1 Chapter 16 1.1 Leverage Degree of operating leverage(DOL Degree of Financing

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