Cfa Level 1 Leverage/capital Structure

Front 1

Operating leverage

Back 1

Trade-off between variable and fixed costs. High operating leverage generally produces a higher rate of return. A firm is said to have high operating leverage if a high % of its costs are fixed. Indicates a small cahnge in sales will cause a large change in operating income.

Front 2

Degree of Operating leverage formulas

Back 2

% cahnge in EBIT / % cahnge in sales

or

Sales-Variable costs / Sales - varaible costs - fixed costs

Front 3

Break even Quantity

Back 3

Price per unit X (quantity) = (Variable cost per unit X quantity) + fixed costs

Front 4

Financial leverage

Back 4

Refers to the use of fixed income secrurities. Measures % change in EPS for a given % change in EBIT

Front 5

Degree of financial leverage formula

Back 5

= % change in EPS / % change in EBIT

or

EBIT / (EBIT - interest)

Front 6

Degree of Total Leverage

Back 6

= DOL X DFL

or

=S-V / (S-V-F-int)

or

=% change EPS / % change Sales

Front 7

Optimal capital structure

Back 7

Where WACC is minimized and STOCK PRICE is at its maximum