CFFM6_ch 13_slides

CFFM6_ch 13_slides - Capital Structure and Leverage Chapter...

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Unformatted text preview: Capital Structure and Leverage Chapter 13 Business vs. Financial Risk Optimal Capital Structure Operating Leverage Capital Structure Theory 13-1 What is operating leverage, and how does it affect a firms business risk? Operating leverage is the use of fixed costs rather than variable costs. If most costs are fixed, hence do not decline when demand falls, then the firm has high operating leverage. 13-2 Effect of Operating Leverage More operating leverage leads to more business risk, for then a small sales decline causes a big profit decline. What happens if variable costs change? Sales $ Rev. TC FC Q BE Sales $ Rev. TC FC Q BE } Profit 13-3 What is financial leverage? Financial risk? Financial leverage is the use of debt and preferred stock. Financial risk is the additional risk concentrated on common stockholders as a result of financial leverage....
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This note was uploaded on 02/22/2012 for the course BUAD 3040 taught by Professor Morris during the Spring '08 term at Toledo.

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CFFM6_ch 13_slides - Capital Structure and Leverage Chapter...

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