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Unformatted text preview: gher the fixed financial costs—typically,
interest on debt and preferred stock dividends—the
LG2 greater the financial leverage. The total leverage of
the firm is the use of fixed costs—both operating
and financial—to magnify the effects of changes in
sales on EPS. Total leverage reflects the combined
effect of operating and financial leverage.
Describe the types of capital, external assessment of capital structure, the capital structure
of non-U.S. firms, and capital structure theory. Two
basic types of capital—debt capital and equity capital—make up a firm’s capital structure. They differ
with respect to voice in management, claims on income and assets, maturity, and tax treatment. Capital structure can be externally assessed by using financial ratios—debt ratio, times interest earned
ratio, and fixed-payment coverage ratio. Non-U.S.
companies tend to have much higher degrees of indebtedness than do their U.S. counterparts, primarily because U.S. capital markets are much more developed. Similarit...
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