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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.
- Spring '14