Review questions 111 what is meant by the term

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Unformatted text preview: the sale price per unit, and the variable operating cost per unit affect it? 11–3 What is operating leverage? What causes it? How is the degree of operating leverage (DOL) measured? 11–4 What is financial leverage? What causes it? How is the degree of financial leverage (DFL) measured? 11–5 What is the general relationship among operating leverage, financial leverage, and the total leverage of the firm? Do these types of leverage complement each other? Why or why not? LG3 LG4 The Firm’s Capital Structure Capital structure is one of the most complex areas of financial decision making because of its interrelationship with other financial decision variables.9 Poor capital structure decisions can result in a high cost of capital, thereby lowering the NPVs of projects and making more of them unacceptable. Effective capital structure decisions can lower the cost of capital, resulting in higher NPVs and more acceptable projects—and thereby increasing the value of the firm. This section links together many of the concepts presented in...
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