Operating and Financial Leverage презентация

Содержание

1. Operating and Financial Leverage
2. After studying Chapter 16, you should be
3. Operating and Financial Leverage Operating Leverage Financial
4. Operating Leverage One potential “effect” caused by
5. Impact of Operating Leverage on Profits
6. Impact of Operating Leverage on Profits
7. Impact of Operating Leverage on Profits
8. Impact of Operating Leverage on Profits Firm
9. Break-Even Analysis When studying operating leverage, “profits”
10. Break-Even Chart QUANTITY PRODUCED AND
11. Break-Even (Quantity) Point How to find
12. Break-Even (Quantity) Point Breakeven occurs when
13. Break-Even (Sales) Point How to
14. Break-Even Point Example Basket Wonders (BW)
15. Break-Even Point (s) Breakeven occurs
16. Break-Even Chart QUANTITY PRODUCED AND
17. Degree of Operating Leverage (DOL) DOL at
18. Computing the DOL DOLQ units Calculating the
19. Computing the DOL DOLS dollars of sales
20. Break-Even Point Example Lisa Miller wants
21. Computing BW’s DOL DOL6,000 units Computation based
22. Interpretation of the DOL A 1% increase
23. Interpretation of the DOL
24. Interpretation of the DOL DOL is a
25. DOL and Business Risk DOL is only
26. Application of DOL for Our Three Firm
27. Application of DOL for Our Three Firm
28. Application of DOL for Our Three-Firm Example
29. Application of DOL for Our Three-Firm Example
30. Financial Leverage Financial leverage is acquired by
31. EBIT-EPS Break-Even, or Indifference, Analysis Calculate EPS
32. EBIT-EPS Chart Current common equity
33. EBIT-EPS Calculation with New Equity Financing
34. EBIT-EPS Chart 0
35. EBIT-EPS Calculation with New Debt Financing
36. EBIT-EPS Chart 0
37. EBIT-EPS Calculation with New Preferred Financing
38. 0 100
39. What About Risk? 0
40. What About Risk? 0
41. Degree of Financial Leverage (DFL) DFL at
42. Computing the DFL DFL EBIT of $X
43. What is the DFL for Each of
44. What is the DFL for Each of
45. What is the DFL for Each of
46. Variability of EPS Preferred stock financing will
47. Financial Risk Debt increases the probability of
48. Total Firm Risk CVEPS is a
49. Degree of Total Leverage (DTL) DTL at
50. Computing the DTL DTL S dollars of
51. DTL Example Lisa Miller wants to
52. Computing the DTL for All-Equity Financing
53. Computing the DTL for Debt Financing
54. Risk versus Return Compare the expected EPS
55. What is an Appropriate Amount of
56. Coverage Ratios Interest Coverage EBIT Interest
57. Coverage Ratios Debt-service Coverage EBIT {
58. Coverage Example Make an examination of the
59. Coverage Example Compare the interest coverage and
60. Coverage Example -250
61. Summary of the Coverage Ratio Discussion A
62. Other Methods of Analysis Often, firms are
63. Other Methods of Analysis Firms may gain
64. Other Methods of Analysis Firms must consider

After studying Chapter 16, you should be able to: Define operating and financial leverage and identify causes of both. Calculate a firm’s operating break-even (quantity) point and break-even (sales) point

Слайд 1Chapter 16
Operating and Financial Leverage

Слайд 2After studying Chapter 16, you should be able to:
Define operating and

financial leverage and identify causes of both.
Calculate a firm’s operating break-even (quantity) point and break-even (sales) point .
Define, calculate, and interpret a firm's degree of operating, financial, and total leverage.
Understand EBIT-EPS break-even, or indifference, analysis, and construct and interpret an EBIT-EPS chart.
Define, discuss, and quantify “total firm risk” and its two components, “business risk” and “financial risk.”
Understand what is involved in determining the appropriate amount of financial leverage for a firm.

Слайд 3Operating and Financial Leverage
Operating Leverage
Financial Leverage
Total Leverage
Cash-Flow Ability to Service Debt
Other

Methods of Analysis
Combination of Methods

Слайд 4Operating Leverage
One potential “effect” caused by the presence of operating leverage

is that a change in the volume of sales results in a “more than proportional” change in operating profit (or loss).

Operating Leverage -- The use of fixed operating costs by the firm.

Слайд 5Impact of Operating Leverage on Profits
Firm F

Firm V Firm 2F
Sales $10 $11 $19.5
Operating Costs
Fixed 7 2 14
Variable 2 7 3
Operating Profit $ 1 $ 2 $ 2.5
FC/total costs .78 .22 .82
FC/sales .70 .18 .72

(in thousands)

Слайд 6
Impact of Operating Leverage on Profits
Now, subject each firm to a

50% increase in sales for next year.
Which firm do you think will be more “sensitive” to the change in sales (i.e., show the largest percentage change in operating profit, EBIT)?
[ ] Firm F; [ ] Firm V; [ ] Firm 2F.

Слайд 7Impact of Operating Leverage on Profits
Firm F

Firm V Firm 2F
Sales $15 $16.5 $29.25
Operating Costs
Fixed 7 2 14
Variable 3 10.5 4.5
Operating Profit $ 5 $ 4 $10.75
Percentage Change in EBIT* 400% 100% 330%

(in thousands)

* (EBITt - EBIT t-1) / EBIT t-1

Слайд 8Impact of Operating Leverage on Profits
Firm F is the most “sensitive”

firm -- for it, a 50% increase in sales leads to a 400% increase in EBIT.
Our example reveals that it is a mistake to assume that the firm with the largest absolute or relative amount of fixed costs automatically shows the most dramatic effects of operating leverage.
Later, we will come up with an easy way to spot the firm that is most sensitive to the presence of operating leverage.

Слайд 9Break-Even Analysis
When studying operating leverage, “profits” refers to operating profits before

taxes (i.e., EBIT) and excludes debt interest and dividend payments.

Break-Even Analysis -- A technique for studying the relationship among fixed costs, variable costs, sales volume, and profits. Also called cost/volume/profit (C/V/P) analysis.

Слайд 10

Break-Even Chart
QUANTITY PRODUCED AND SOLD
0 1,000 2,000 3,000

4,000 5,000 6,000 7,000

Total Revenues

Profits

Fixed Costs

Variable Costs

Losses

REVENUES AND COSTS
($ thousands)

175

250

100

Total Costs

Слайд 11
Break-Even (Quantity) Point
How to find the quantity break-even point:
EBIT

= P(Q) - V(Q) - FC
EBIT = Q(P - V) - FC
P = Price per unit V = Variable costs per unit
FC = Fixed costs Q = Quantity (units) produced and sold

Break-Even Point -- The sales volume required so that total revenues and total costs are equal; may be in units or in sales dollars.

Слайд 12
Break-Even (Quantity) Point
Breakeven occurs when EBIT = 0
Q (P -

V) - FC = EBIT
QBE (P - V) - FC = 0
QBE (P - V) = FC
QBE = FC / (P - V)

a.k.a. Unit Contribution Margin

Слайд 13

Break-Even (Sales) Point
How to find the sales break-even point:
SBE =

FC + (VCBE)
SBE = FC + (QBE )(V)
or
SBE * = FC / [1 - (VC / S) ]

* Refer to text for derivation of the formula

Слайд 14Break-Even Point Example

Basket Wonders (BW) wants to determine both the quantity

and sales break-even points when:
Fixed costs are $100,000
Baskets are sold for $43.75 each
Variable costs are $18.75 per basket

Слайд 15

Break-Even Point (s)
Breakeven occurs when:
QBE = FC / (P - V)

QBE = $100,000 / ($43.75 - $18.75)
QBE = 4,000 Units
SBE = (QBE )(V) + FC
SBE = (4,000 )($18.75) + $100,000
SBE = $175,000

Слайд 16

Break-Even Chart
QUANTITY PRODUCED AND SOLD
0 1,000 2,000 3,000

4,000 5,000 6,000 7,000

Total Revenues

Profits

Fixed Costs

Variable Costs

Losses

REVENUES AND COSTS
($ thousands)

175

250

100

Total Costs

Слайд 17Degree of Operating Leverage (DOL)
DOL at Q units of output
(or

sales)

Degree of Operating Leverage -- The percentage change in a firm’s operating profit (EBIT) resulting from a 1 percent change in output (sales).

Percentage change in
operating profit (EBIT)

Percentage change in
output (or sales)

Слайд 18Computing the DOL
DOLQ units
Calculating the DOL for a single product or

a single-product firm.

Q (P - V)

Q (P - V) - FC

Q - QBE

Слайд 19Computing the DOL
DOLS dollars of sales
Calculating the DOL for a multiproduct

firm.

S - VC

S - VC - FC

EBIT + FC

EBIT

Слайд 20Break-Even Point Example

Lisa Miller wants to determine the degree of operating

leverage at sales levels of 6,000 and 8,000 units. As we did earlier, we will assume that:
Fixed costs are $100,000
Baskets are sold for $43.75 each
Variable costs are $18.75 per basket

Слайд 21Computing BW’s DOL
DOL6,000 units
Computation based on the previously calculated break-even point

of 4,000 units

6,000

6,000 - 4,000

DOL8,000 units

8,000

8,000 - 4,000

Слайд 22Interpretation of the DOL
A 1% increase in sales above the 8,000

unit level increases EBIT by 2% because of the existing operating leverage of the firm.

DOL8,000 units

8,000

8,000 - 4,000

Слайд 23Interpretation of the DOL

2,000 4,000

6,000 8,000

QUANTITY PRODUCED AND SOLD

-1

-2

-3

-4

-5

DEGREE OF OPERATING
LEVERAGE (DOL)

QBE

Слайд 24Interpretation of the DOL
DOL is a quantitative measure of the “sensitivity”

of a firm’s operating profit to a change in the firm’s sales.
The closer that a firm operates to its break-even point, the higher is the absolute value of its DOL.
When comparing firms, the firm with the highest DOL is the firm that will be most “sensitive” to a change in sales.

Key Conclusions to be Drawn from the previous slide and our Discussion of DOL

Слайд 25DOL and Business Risk
DOL is only one component of business risk

and becomes “active” only in the presence of sales and production cost variability.
DOL magnifies the variability of operating profits and, hence, business risk.

Business Risk -- The inherent uncertainty in the physical operations of the firm. Its impact is shown in the variability of the firm’s operating income (EBIT).

Слайд 26Application of DOL for Our Three Firm Example
Use the data in

Slide 16-5 and the following formula for Firm F:
DOL = [(EBIT + FC)/EBIT]

DOL$10,000 sales

1,000 + 7,000

1,000

8.0

Слайд 27Application of DOL for Our Three Firm Example
Use the data in

Slide 16-5 and the following formula for Firm V:
DOL = [(EBIT + FC)/EBIT]

DOL$11,000 sales

2,000 + 2,000

2,000

2.0

Слайд 28Application of DOL for Our Three-Firm Example
Use the data in Slide

16-5 and the following formula for Firm 2F:
DOL = [(EBIT + FC)/EBIT]

DOL$19,500 sales

2,500 + 14,000

2,500

6.6

Слайд 29Application of DOL for Our Three-Firm Example
The ranked results indicate that

the firm most sensitive to the presence of operating leverage is Firm F.
Firm F DOL = 8.0
Firm V DOL = 6.6
Firm 2F DOL = 2.0

Firm F will expect a 400% increase in profit from a 50% increase in sales (see Slide 16-7 results).

Слайд 30Financial Leverage
Financial leverage is acquired by choice.
Used as a means of

increasing the return to common shareholders.

Financial Leverage -- The use of fixed financing costs by the firm. The British expression is gearing.

Слайд 31EBIT-EPS Break-Even, or Indifference, Analysis
Calculate EPS for a given level of

EBIT at a given financing structure.

EBIT-EPS Break-Even Analysis -- Analysis of the effect of financing alternatives on earnings per share. The break-even point is the EBIT level where EPS is the same for two (or more) alternatives.

(EBIT - I) (1 - t) - Pref. Div.

# of Common Shares

EPS

Слайд 32EBIT-EPS Chart

Current common equity shares = 50,000
$1 million in new financing

of either:
All C.S. sold at $20/share (50,000 shares)
All debt with a coupon rate of 10%
All P.S. with a dividend rate of 9%
Expected EBIT = $500,000
Income tax rate is 30%

Basket Wonders has $2 million in LT financing (100% common stock equity).

Слайд 33EBIT-EPS Calculation with New Equity Financing

EBIT $500,000

$150,000*
Interest 0 0
EBT $500,000 $150,000
Taxes (30% x EBT) 150,000 45,000
EAT $350,000 $105,000
Preferred Dividends 0 0
EACS $350,000 $105,000
# of Shares 100,000 100,000
EPS $3.50 $1.05

Common Stock Equity Alternative

* A second analysis using $150,000 EBIT rather than the expected EBIT.

Слайд 34EBIT-EPS Chart

0 100 200

300 400 500 600 700

EBIT ($ thousands)

Earnings per Share ($)

Common

Слайд 35EBIT-EPS Calculation with New Debt Financing

EBIT $500,000

$150,000*
Interest 100,000 100,000
EBT $400,000 $ 50,000
Taxes (30% x EBT) 120,000 15,000
EAT $280,000 $ 35,000
Preferred Dividends 0 0
EACS $280,000 $ 35,000
# of Shares 50,000 50,000
EPS $5.60 $0.70

Long-term Debt Alternative

* A second analysis using $150,000 EBIT rather than the expected EBIT.

Слайд 36EBIT-EPS Chart

0 100 200

300 400 500 600 700

EBIT ($ thousands)

Earnings per Share ($)

Common

Debt

Indifference point
between debt and
common stock
financing

Слайд 37EBIT-EPS Calculation with New Preferred Financing

EBIT $500,000

$150,000*
Interest 0 0
EBT $500,000 $150,000
Taxes (30% x EBT) 150,000 45,000
EAT $350,000 $105,000
Preferred Dividends 90,000 90,000
EACS $260,000 $ 15,000
# of Shares 50,000 50,000
EPS $5.20 $0.30

Preferred Stock Alternative

* A second analysis using $150,000 EBIT rather than the expected EBIT.

Слайд 380 100 200

300 400 500 600 700

EBIT-EPS Chart

EBIT ($ thousands)

Earnings per Share ($)

Common

Debt

Indifference point
between preferred
stock and common
stock financing

Preferred

Слайд 39
What About Risk?

0 100 200

300 400 500 600 700

EBIT ($ thousands)

Earnings per Share ($)

Common

Debt

Lower risk. Only a small
probability that EPS will
be less if the debt
alternative is chosen.

Probability of Occurrence
(for the probability distribution)

Слайд 40
What About Risk?

0 100 200

300 400 500 600 700

EBIT ($ thousands)

Earnings per Share ($)

Common

Debt

Higher risk. A much larger
probability that EPS will
be less if the debt
alternative is chosen.

Probability of Occurrence
(for the probability distribution)

Слайд 41Degree of Financial Leverage (DFL)
DFL at EBIT of X dollars
Degree of

Financial Leverage -- The percentage change in a firm’s earnings per share (EPS) resulting from a 1 percent change in operating profit.

Percentage change in
earnings per share (EPS)

Percentage change in
operating profit (EBIT)

Слайд 42Computing the DFL
DFL EBIT of $X
Calculating the DFL
=
EBIT
EBIT - I -

[ PD / (1 - t) ]

EBIT = Earnings before interest and taxes
I = Interest
PD = Preferred dividends
t = Corporate tax rate

Слайд 43What is the DFL for Each of the Financing Choices?
DFL $500,000
Calculating

the DFL for NEW equity* alternative

$500,000

$500,000 - 0 - [0 / (1 - 0)]

* The calculation is based on the expected EBIT

1.00

Слайд 44What is the DFL for Each of the Financing Choices?
DFL $500,000
Calculating

the DFL for NEW debt * alternative

$500,000

{ $500,000 - 100,000
- [0 / (1 - 0)] }

* The calculation is based on the expected EBIT

$500,000 / $400,000

1.25

Слайд 45What is the DFL for Each of the Financing Choices?
DFL $500,000
Calculating

the DFL for NEW preferred * alternative

$500,000

{ $500,000 - 0
- [90,000 / (1 - .30)] }

* The calculation is based on the expected EBIT

$500,000 / $400,000

1.35

Слайд 46Variability of EPS
Preferred stock financing will lead to the greatest variability

in earnings per share based on the DFL.
This is due to the tax deductibility of interest on debt financing.

DFLEquity = 1.00
DFLDebt = 1.25
DFLPreferred = 1.35

Which financing method will have the greatest relative variability in EPS?

Слайд 47Financial Risk
Debt increases the probability of cash insolvency over an all-equity-financed

firm. For example, our example firm must have EBIT of at least $100,000 to cover the interest payment.
Debt also increased the variability in EPS as the DFL increased from 1.00 to 1.25.

Financial Risk -- The added variability in earnings per share (EPS) -- plus the risk of possible insolvency -- that is induced by the use of financial leverage.

Слайд 48
Total Firm Risk
CVEPS is a measure of relative total firm risk
CVEBIT

is a measure of relative business risk
The difference, CVEPS - CVEBIT, is a measure of relative financial risk

Total Firm Risk -- The variability in earnings per share (EPS). It is the sum of business plus financial risk.

Total firm risk = business risk + financial risk

Слайд 49Degree of Total Leverage (DTL)
DTL at Q units (or S dollars)

of output (or sales)

Degree of Total Leverage -- The percentage change in a firm’s earnings per share (EPS) resulting from a 1 percent change in output (sales).

Percentage change in
earnings per share (EPS)

Percentage change in
output (or sales)

Слайд 50Computing the DTL
DTL S dollars
of sales

DTL Q units (or S dollars)

= ( DOL Q units (or S dollars) ) x ( DFL EBIT of X dollars )

EBIT + FC

EBIT - I - [ PD / (1 - t) ]

DTL Q units

Q (P - V)

Q (P - V) - FC - I - [ PD / (1 - t) ]

Слайд 51DTL Example

Lisa Miller wants to determine the Degree of Total Leverage

at EBIT=$500,000. As we did earlier, we will assume that:
Fixed costs are $100,000
Baskets are sold for $43.75 each
Variable costs are $18.75 per basket

Слайд 52Computing the DTL for All-Equity Financing
DTL S dollars
of sales

=
$500,000 + $100,000
$500,000

- 0 - [ 0 / (1 - .3) ]

DTLS dollars = (DOL S dollars) x (DFLEBIT of $S )
DTLS dollars = (1.2 ) x ( 1.0* ) = 1.20

1.20

*Note: No financial leverage.

Слайд 53Computing the DTL for Debt Financing
DTL S dollars
of sales

=
$500,000 + $100,000
{

$500,000 - $100,000
- [ 0 / (1 - .3) ] }

DTLS dollars = (DOL S dollars) x (DFLEBIT of $S )
DTLS dollars = (1.2 ) x ( 1.25* ) = 1.50

1.50

*Note: Calculated on Slide 16-44.

Слайд 54Risk versus Return
Compare the expected EPS to the DTL for the

common stock equity financing approach to the debt financing approach.
Financing E(EPS) DTL
Equity $3.50 1.20
Debt $5.60 1.50
Greater expected return (higher EPS) comes at the expense of greater potential risk (higher DTL)!

Слайд 55What is an Appropriate Amount of Financial Leverage?
Firms must first analyze

their expected future cash flows.
The greater and more stable the expected future cash flows, the greater the debt capacity.
Fixed charges include: debt principal and interest payments, lease payments, and preferred stock dividends.

Debt Capacity -- The maximum amount of debt (and other fixed-charge financing) that a firm can adequately service.

Слайд 56Coverage Ratios
Interest Coverage

EBIT
Interest expenses
Indicates a firm’s ability to cover interest charges.

Income

Statement
Ratios

Coverage Ratios

A ratio value equal to 1
indicates that earnings
are just sufficient to
cover interest charges.

Слайд 57Coverage Ratios
Debt-service Coverage

EBIT
{ Interest expenses + [Principal payments / (1-t) ]

}

Indicates a firm’s ability to cover interest expenses and principal payments.

Income Statement
Ratios

Coverage Ratios

Allows us to examine the
ability of the firm to meet
all of its debt payments.
Failure to make principal
payments is also default.

Слайд 58Coverage Example
Make an examination of the coverage ratios for Basket Wonders

when EBIT=$500,000. Compare the equity and the debt financing alternatives.
Assume that:
Interest expenses remain at $100,000
Principal payments of $100,000 are made yearly for 10 years

Слайд 59Coverage Example
Compare the interest coverage and debt burden ratios for equity

and debt financing.
Interest Debt-service
Financing Coverage Coverage
Equity Infinite Infinite
Debt 5.00 2.50
The firm actually has greater risk than the interest coverage ratio initially suggests.

Слайд 60

Coverage Example
-250 0 250

500 750 1,000 1,250

EBIT ($ thousands)

Firm B has a much
smaller probability
of failing to meet its
obligations than Firm A.

Firm B

Firm A

Debt-service burden
= $200,000

PROBABILITY OF OCCURRENCE

Слайд 61Summary of the Coverage Ratio Discussion
A single ratio value cannot be

interpreted identically for all firms as some firms have greater debt capacity.
Annual financial lease payments should be added to both the numerator and denominator of the debt-service coverage ratio as financial leases are similar to debt.

The debt-service coverage ratio accounts for required annual principal payments.

Слайд 62Other Methods of Analysis
Often, firms are compared to peer institutions in

the same industry.
Large deviations from norms must be justified.
For example, an industry’s median debt-to-net-worth ratio might be used as a benchmark for financial leverage comparisons.

Capital Structure -- The mix (or proportion) of a firm’s permanent long-term financing represented by debt, preferred stock, and common stock equity.

Слайд 63Other Methods of Analysis
Firms may gain insight into the financial markets’

evaluation of their firm by talking with:
Investment bankers
Institutional investors
Investment analysts
Lenders

Surveying Investment Analysts and Lenders

Слайд 64Other Methods of Analysis
Firms must consider the impact of any financing

decision on the firm’s security rating(s).

Security Ratings

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Operating and Financial Leverage презентация

Содержание

Слайд 1Chapter 16Operating and Financial Leverage

Слайд 2After studying Chapter 16, you should be able to:Define operating and

Слайд 3Operating and Financial LeverageOperating LeverageFinancial LeverageTotal LeverageCash-Flow Ability to Service DebtOther

Слайд 4Operating LeverageOne potential “effect” caused by the presence of operating leverage

Слайд 5Impact of Operating Leverage on Profits Firm F

Слайд 6Impact of Operating Leverage on ProfitsNow, subject each firm to a

Слайд 7Impact of Operating Leverage on Profits Firm F

Слайд 8Impact of Operating Leverage on ProfitsFirm F is the most “sensitive”

Слайд 9Break-Even AnalysisWhen studying operating leverage, “profits” refers to operating profits before

Слайд 10Break-Even ChartQUANTITY PRODUCED AND SOLD0 1,000 2,000 3,000

Слайд 11Break-Even (Quantity) Point How to find the quantity break-even point: EBIT

Слайд 12Break-Even (Quantity) PointBreakeven occurs when EBIT = 0 Q (P -

Слайд 13Break-Even (Sales) PointHow to find the sales break-even point: SBE =

Слайд 14Break-Even Point Example Basket Wonders (BW) wants to determine both the quantity

Слайд 15Break-Even Point (s)Breakeven occurs when: QBE = FC / (P - V)

Слайд 16Break-Even ChartQUANTITY PRODUCED AND SOLD0 1,000 2,000 3,000

Слайд 17Degree of Operating Leverage (DOL)DOL at Q units of output (or

Слайд 18Computing the DOLDOLQ unitsCalculating the DOL for a single product or

Слайд 19Computing the DOLDOLS dollars of salesCalculating the DOL for a multiproduct

Слайд 20Break-Even Point Example Lisa Miller wants to determine the degree of operating

Слайд 21Computing BW’s DOLDOL6,000 unitsComputation based on the previously calculated break-even point

Слайд 22Interpretation of the DOLA 1% increase in sales above the 8,000

Слайд 23Interpretation of the DOL2,000 4,000

Слайд 24Interpretation of the DOLDOL is a quantitative measure of the “sensitivity”

Слайд 25DOL and Business RiskDOL is only one component of business risk

Слайд 26Application of DOL for Our Three Firm ExampleUse the data in

Слайд 27Application of DOL for Our Three Firm ExampleUse the data in

Слайд 28Application of DOL for Our Three-Firm ExampleUse the data in Slide

Слайд 29Application of DOL for Our Three-Firm ExampleThe ranked results indicate that

Слайд 30Financial LeverageFinancial leverage is acquired by choice.Used as a means of

Слайд 31EBIT-EPS Break-Even, or Indifference, AnalysisCalculate EPS for a given level of

Слайд 32EBIT-EPS ChartCurrent common equity shares = 50,000$1 million in new financing

Слайд 33EBIT-EPS Calculation with New Equity FinancingEBIT $500,000

Слайд 34EBIT-EPS Chart0 100 200

Слайд 35EBIT-EPS Calculation with New Debt FinancingEBIT $500,000

Слайд 36EBIT-EPS Chart0 100 200

Слайд 37EBIT-EPS Calculation with New Preferred FinancingEBIT $500,000

Слайд 380 100 200

Слайд 39What About Risk?0 100 200

Слайд 40What About Risk?0 100 200

Слайд 41Degree of Financial Leverage (DFL)DFL at EBIT of X dollarsDegree of

Слайд 42Computing the DFLDFL EBIT of $XCalculating the DFL=EBITEBIT - I -

Слайд 43What is the DFL for Each of the Financing Choices?DFL $500,000Calculating

Слайд 44What is the DFL for Each of the Financing Choices?DFL $500,000Calculating

Слайд 45What is the DFL for Each of the Financing Choices?DFL $500,000Calculating

Слайд 46Variability of EPSPreferred stock financing will lead to the greatest variability

Слайд 47Financial RiskDebt increases the probability of cash insolvency over an all-equity-financed

Слайд 48Total Firm RiskCVEPS is a measure of relative total firm riskCVEBIT

Слайд 49Degree of Total Leverage (DTL)DTL at Q units (or S dollars)

Слайд 50Computing the DTLDTL S dollars of salesDTL Q units (or S dollars)

Слайд 51DTL Example Lisa Miller wants to determine the Degree of Total Leverage

Слайд 52Computing the DTL for All-Equity FinancingDTL S dollars of sales=$500,000 + $100,000$500,000

Слайд 53Computing the DTL for Debt FinancingDTL S dollars of sales=$500,000 + $100,000{

Слайд 54Risk versus ReturnCompare the expected EPS to the DTL for the

Слайд 55What is an Appropriate Amount of Financial Leverage?Firms must first analyze

Слайд 56Coverage RatiosInterest CoverageEBITInterest expensesIndicates a firm’s ability to cover interest charges.Income

Слайд 57Coverage RatiosDebt-service CoverageEBIT{ Interest expenses + [Principal payments / (1-t) ]

Слайд 58Coverage ExampleMake an examination of the coverage ratios for Basket Wonders

Слайд 59Coverage ExampleCompare the interest coverage and debt burden ratios for equity

Слайд 60Coverage Example-250 0 250

Слайд 61Summary of the Coverage Ratio DiscussionA single ratio value cannot be

Слайд 62Other Methods of AnalysisOften, firms are compared to peer institutions in

Слайд 63Other Methods of AnalysisFirms may gain insight into the financial markets’

Слайд 64Other Methods of AnalysisFirms must consider the impact of any financing

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Слайд 1Chapter 16
Operating and Financial Leverage

Слайд 2After studying Chapter 16, you should be able to:
Define operating and

Слайд 3Operating and Financial Leverage
Operating Leverage
Financial Leverage
Total Leverage
Cash-Flow Ability to Service Debt
Other

Слайд 4Operating Leverage
One potential “effect” caused by the presence of operating leverage

Слайд 5Impact of Operating Leverage on Profits
Firm F

Слайд 6
Impact of Operating Leverage on Profits
Now, subject each firm to a

Слайд 7Impact of Operating Leverage on Profits
Firm F

Слайд 8Impact of Operating Leverage on Profits
Firm F is the most “sensitive”

Слайд 9Break-Even Analysis
When studying operating leverage, “profits” refers to operating profits before

Слайд 10

Break-Even Chart
QUANTITY PRODUCED AND SOLD
0 1,000 2,000 3,000

Слайд 11
Break-Even (Quantity) Point
How to find the quantity break-even point:
EBIT

Слайд 12
Break-Even (Quantity) Point
Breakeven occurs when EBIT = 0
Q (P -

Слайд 13

Break-Even (Sales) Point
How to find the sales break-even point:
SBE =

Слайд 14Break-Even Point Example

Basket Wonders (BW) wants to determine both the quantity

Слайд 15

Break-Even Point (s)
Breakeven occurs when:
QBE = FC / (P - V)

Слайд 16

Break-Even Chart
QUANTITY PRODUCED AND SOLD
0 1,000 2,000 3,000

Слайд 17Degree of Operating Leverage (DOL)
DOL at Q units of output
(or

Слайд 18Computing the DOL
DOLQ units
Calculating the DOL for a single product or

Слайд 19Computing the DOL
DOLS dollars of sales
Calculating the DOL for a multiproduct

Слайд 20Break-Even Point Example

Lisa Miller wants to determine the degree of operating

Слайд 21Computing BW’s DOL
DOL6,000 units
Computation based on the previously calculated break-even point

Слайд 22Interpretation of the DOL
A 1% increase in sales above the 8,000

Слайд 23Interpretation of the DOL

2,000 4,000

Слайд 24Interpretation of the DOL
DOL is a quantitative measure of the “sensitivity”

Слайд 25DOL and Business Risk
DOL is only one component of business risk

Слайд 26Application of DOL for Our Three Firm Example
Use the data in

Слайд 27Application of DOL for Our Three Firm Example
Use the data in

Слайд 28Application of DOL for Our Three-Firm Example
Use the data in Slide

Слайд 29Application of DOL for Our Three-Firm Example
The ranked results indicate that

Слайд 30Financial Leverage
Financial leverage is acquired by choice.
Used as a means of

Слайд 31EBIT-EPS Break-Even, or Indifference, Analysis
Calculate EPS for a given level of

Слайд 32EBIT-EPS Chart

Current common equity shares = 50,000
$1 million in new financing

Слайд 33EBIT-EPS Calculation with New Equity Financing

EBIT $500,000

Слайд 34EBIT-EPS Chart

0 100 200

Слайд 35EBIT-EPS Calculation with New Debt Financing

EBIT $500,000

Слайд 36EBIT-EPS Chart

0 100 200

Слайд 37EBIT-EPS Calculation with New Preferred Financing

EBIT $500,000

Слайд 39
What About Risk?

0 100 200

Слайд 40
What About Risk?

0 100 200

Слайд 41Degree of Financial Leverage (DFL)
DFL at EBIT of X dollars
Degree of

Слайд 42Computing the DFL
DFL EBIT of $X
Calculating the DFL
=
EBIT
EBIT - I -

Слайд 43What is the DFL for Each of the Financing Choices?
DFL $500,000
Calculating

Слайд 44What is the DFL for Each of the Financing Choices?
DFL $500,000
Calculating

Слайд 45What is the DFL for Each of the Financing Choices?
DFL $500,000
Calculating

Слайд 46Variability of EPS
Preferred stock financing will lead to the greatest variability

Слайд 47Financial Risk
Debt increases the probability of cash insolvency over an all-equity-financed

Слайд 48
Total Firm Risk
CVEPS is a measure of relative total firm risk
CVEBIT

Слайд 49Degree of Total Leverage (DTL)
DTL at Q units (or S dollars)

Слайд 50Computing the DTL
DTL S dollars
of sales

DTL Q units (or S dollars)

Слайд 51DTL Example

Lisa Miller wants to determine the Degree of Total Leverage

Слайд 52Computing the DTL for All-Equity Financing
DTL S dollars
of sales

=
$500,000 + $100,000
$500,000

Слайд 53Computing the DTL for Debt Financing
DTL S dollars
of sales

=
$500,000 + $100,000
{

Слайд 54Risk versus Return
Compare the expected EPS to the DTL for the

Слайд 55What is an Appropriate Amount of Financial Leverage?
Firms must first analyze

Слайд 56Coverage Ratios
Interest Coverage

EBIT
Interest expenses
Indicates a firm’s ability to cover interest charges.

Income

Слайд 57Coverage Ratios
Debt-service Coverage

EBIT
{ Interest expenses + [Principal payments / (1-t) ]

Слайд 58Coverage Example
Make an examination of the coverage ratios for Basket Wonders

Слайд 59Coverage Example
Compare the interest coverage and debt burden ratios for equity

Слайд 60

Coverage Example
-250 0 250

Слайд 61Summary of the Coverage Ratio Discussion
A single ratio value cannot be

Слайд 62Other Methods of Analysis
Often, firms are compared to peer institutions in

Слайд 63Other Methods of Analysis
Firms may gain insight into the financial markets’

Слайд 64Other Methods of Analysis
Firms must consider the impact of any financing