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10 Cards in this Set
- Front
- Back
Business Risk |
Risk associated with a firm's operating income |
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2 Types of Business Risk |
Sales risk (uncertainty about firm's sales) and operating risk (uncertainty about operating earnings caused by fixed operating costs) |
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Financial Risk |
Additional risk that the firm's common shareholders must bear when a firm uses fixed cost (debt) financing |
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Degree of Operating Leverage |
Q (P-V) / Q (P-V) - F OR % change in EBIT / % change in sales |
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Degree of Financial Leverage |
EBIT / EBIT - I OR % change in EPS / % change in EBIT |
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Degree of Total Leverage |
DOL * DFL OR % change in EPS / % change in sales |
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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 |
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Breakeven Qty. of Sales Formula |
(fixed operating costs + fixed financing costs) / (price - variable cost per unit) |
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Operating Breakeven Qty. of Sales Formula |
Fixed Operating Costs / (price - variable cost per unit) |
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Expected Impact on Return of Increased DOL or DFL |
Increase in expected return (positive risk/return relationship)
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