Chapter 14-Web Appendix 14A Solutions

Chapter 14-Web Appendix 14A Solutions - Web Appendix 14A...

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Unformatted text preview: Web Appendix 14A Degree of Leverage Answers to Questions 14A-1 An increase in a firm’s operating leverage would call for the firm to use less debt in its optimal capital structure. A decrease in the firm’s operating leverage would call for the firm to use more debt in its optimal capital structure. Operating leverage is the firm’s use of fixed costs in its operations. One can think of interest on debt as a fixed financial cost so if operating fixed costs are set high, interest or fixed financial costs must be low. 14A-2 Short-term leases are not capitalized. By replacing fixed assets with short-term leases (which would be off the balance sheet) the firm would be increasing its operating leverage (leasing expense would be operating costs), lowering its financial leverage (because leases would be off the balance sheet), but the net effect of total leverage would be the same—no change. 14A-3 DTL = DOL × DFL. The greater the use of fixed operating costs as measured by the degree of operating leverage, the more sensitive EBIT will be to changes in sales....
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This note was uploaded on 01/11/2012 for the course FIN 3403 taught by Professor Tapley during the Fall '06 term at University of Florida.

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Chapter 14-Web Appendix 14A Solutions - Web Appendix 14A...

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