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Chapter 5

Operating and FinancialLeverage

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PPT 5-1

FIGURE 5-1

Break-even chart:

Leveraged ir!

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PPT 5-"

T#BLE 5-"$%l&!e-c%'t-pr%it anal('i':

Leveraged ir!

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PPT 5-)FIGURE 5-"

Break-even chart:

C%n'ervative ir!

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PPT 5-*

T#BLE 5-)

$%l&!e-c%'t-pr%it anal('i':C%n'ervative ir!

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PPT 5-5

T#BLE 5-*Operating inc%!e %r

l%''

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PPT 5-+

FIGURE 5-)

,%nlinear reak-even

anal('i'

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PPT 5-.

FIGURE 5-*

Financing plan' and

earning' per 'hare

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PPT 5-/T#BLE 5-5

I!pact % inancing

plan %n earning'

per 'hare

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PPT 5-0

T#BLE 5-+Inc%!e 'tate!ent

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PPT 5-1

FIGURE 5-5

C%!ining

%peratingand inancial

leverage

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PPT 5-11

T#BLE 5-.

Operating andinancial leverage

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Chapter 5 - Outline LT 5-1

What is Leverage?

Break-Even (BE) Point

Operating Leverage

Finanial Leverage

Leverage !eans "iskCo#$ine% or Total Leverage

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What is Leverage? LT 5-&

Leverage is using 'ie% osts to #agni' the

potential return to a 'ir#

& tpes o' 'ie% osts*

+ 'ie% operating osts , rent %epreiation+ 'ie% 'inanial osts , i osts 'ro# %e$t

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Break-Even (BE) Point

.uantit /here Total "evenue e0uals Total Cost

Co#pan has no Pro'it or Loss

BE , FC P + 2C

3 leverage% 'ir# has a high BE point

3 non-leverage% 'ir# has a lo/ BE point

LT 5-4

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Operating Leverage LT 5-

!easure o' the a#ount o' 'ie% operating osts

use% $ a 'ir#

6egree o' Operating Leverage (6OL) , 7age in EB8T (or O8) 7agein 9ales

ain 9alesa largerin EB8T (or O8)

Operating Leverage #easures the sensitivit o' a

'ir#:s operating ino#e to ain sales

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Finanial Leverage LT 5-5

!easure o' the a#ount o' %e$t use% $ a 'ir#

6egree o' Finanial Leverage (6FL) , 7age

in EP9 7agein EB8T (or O8)ain EB8T (or O8)a largerin EP9

Finanial Leverage #easures the sensitivit o' a

'ir#:s earnings per share to ain operating

ino#e

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Leverage !eans "isk LT 5-;

Leverage is a %ou$le-e%ge% s/or%

8t #agni'ies pro'its as /ell as losses

3n aggressive or highl leverage% 'ir# has high'ie% osts (an% a relativel high $reak-even point)

3 onservative or non-leverage% 'ir# has lo/ 'ie%

osts (an% a relativel lo/ $reak-even point)!an

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Co#$ine% or Total Leverage LT 5-=

"epresents #ai#u# use o' leverage

6egree o' Co#$ine% or Total Leverage

(6CL or 6TL) , 7agein EP9 7age

in 9ales

ain 9alesa largerin EP99hort-ut 'or#ula*

6CL or 6TL , 6OL 6FL