The firms financial leverage is determined by its

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Unformatted text preview: y its capital structure— its mix of long-term debt and equity financing. Because of its fixed interest payments, the more debt a firm employs relative to its equity, the greater its financial leverage. The value of the firm is clearly affected by its degree of operating leverage and by the composition of its capital structure. The financial manager must carefully consider the types of operating and financial costs the firm incurs, recognizing that with greater fixed costs comes higher risk. Major decisions with regard to both operating cost structure and capital structure must therefore focus on their impact on the firm’s value. Only those leverage and capital structure decisions that are consistent with the firm’s goal of maximizing its stock price should be implemented. REVIEW OF LEARNING GOALS Discuss the role of breakeven analysis, the operating breakeven point, and the effect of changing costs on it. Breakeven analysis measures the level of sales necessary to cover total operating costs. The operating breakeven point may be...
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This document was uploaded on 03/30/2014.

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