Problem Day Test 2 Review 11.16.2011 - clean

# Problem Day Test 2 Review 11.16.2011 - clean - Problem Day...

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Unformatted text preview: Problem Day: Test 2 Prep Housekeeping Items • Test this Thursday and Friday (No Late Fees). Get your test from the testing center by 5pm on Friday!! • Q & A Test Prep TONIGHT from 5-7pm in Room 251 TNRB • No POW Quiz this week and No POW review on Friday • Open Q & A Lab hours Thurs 5pm 210 TNRB • Ch. 8 Reading Quiz due Monday morning at 8am Today’s Agenda • DOL, DFL, DCL Recap • Bonds • Stocks o Preferred o 2-Stage Growth • Capital Budgeting Two sources of risk 1) Business (or Operating) Risk - variability associated with operating income. 2) Financial Risk - risk of distress or bankruptcy due to the use of fixed cost financing. Degree of Operating Leverage (DOL) • Operating leverage: by using fixed operating costs, a small change in sales revenue is magnified into a larger change in operating income . • This “multiplier effect” is called the degree of operating DOLs = % change in EBIT % change in sales change in EBIT EBIT change in sales sales Degree of Operating Leverage from Sales Level (S) = DOL = Degree of Operating Leverage • If we have the data, we can use this formula: Sales - Variable Costs EBIT What does this tell us? • If DOL = 2, then a 1% increase in sales will result in a 2% increase in operating income (EBIT). Degree of Financial Leverage (DFL) •...
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Problem Day Test 2 Review 11.16.2011 - clean - Problem Day...

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