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10 Cards in this Set

  • Front
  • Back

Business Risk

Risk associated with a firm's operating income

2 Types of Business Risk

Sales risk (uncertainty about firm's sales) and operating risk (uncertainty about operating earnings caused by fixed operating costs)

Financial Risk

Additional risk that the firm's common shareholders must bear when a firm uses fixed cost (debt) financing

Degree of Operating Leverage

Q (P-V) / Q (P-V) - F




OR




% change in EBIT / % change in sales

Degree of Financial Leverage

EBIT / EBIT - I




OR % change in EPS / % change in EBIT

Degree of Total Leverage

DOL * DFL




OR % change in EPS / % change in sales

Impact of More Debt on Net Income and Net Equity (and ROE)

Reduces net income (via added interest expense) and reduces net equity




Effect can either increase or decrease ROE

Breakeven Qty. of Sales Formula

(fixed operating costs + fixed financing costs) / (price - variable cost per unit)

Operating Breakeven Qty. of Sales Formula

Fixed Operating Costs / (price - variable cost per unit)

Expected Impact on Return of Increased DOL or DFL

Increase in expected return (positive risk/return relationship)