FIL 240 Lecture 18 Outline of Last Lecture I Breakeven Analysis a Profit b Revenue c Costs d VC e Profit f QBE Outline of Current Lecture I Definition of Leverage a Gains to leverage chart b Use of debt II Degrees of Leverage a Degree of operating leverage b Degree of financial leverage c Degree of combined leverage d DOL equation e DOF equation f DCL equation g What does this mean h How is DCL found III Definition of Capital Structure Current Lecture Leverage I Leverage the use of funds to magnify the effect of the money you invest a Gains to leverage These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute i ii Guy 1 iii Guy 2 v 100 000 vi 100 000 iv Price vii Equity viii 10 000 ix 100 000 x Debt xi 90 000 xii 0 110 000 xiii Selling Pricexiv 110 000 xv xvi Return 110 000 7 200 90 000 12 800 10 000 2 800 10 000 28 xxv xxvi xxvii xxviii xxix II III xvii xviii xix xx xxi xxii xxiii xxiv 110 000 100 000 10 000 100 000 10 b Debt is used to magnify equity but if you borrow money you ll have to pay more back Degrees of Leverage a Degree of operating leverage DOL change EBIT change sales b Degree of financial leverage DOF change net income change EBIT c Degree of combined leverage DCL change net income change sales i Find these ii change sales 105 156 000 99 137 000 99 137 000 6 07 iii change EBIT 3 150 000 2 862 000 2 862 000 10 06 iv change NI 2 039 000 1 709 000 1 709 000 19 31 d DOL 10 06 6 07 1 66 times e DOF 19 31 10 06 1 92 times f DCL 19 31 6 07 3 18 times g Every change of 1 in sales created a change of 3 18 of net income i If DCL is very small it s a safe company Their beta is most likely below 1 h DOL x DOF change EBIT change sales x change NI change EBIT cancel out EBITs DCL i 1 66 DOL x 1 92 DOF 3 19 times DCL Capital Structure the combination of debt equity a company uses to finance its assets
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