FIL 240 Lecture18Outline of Last Lecture I. Breakeven Analysisa. Profitb. Revenuec. Costsd. VCe. Profitf. QBEOutline of Current Lecture I. Definition of Leveragea. Gains to leverage chartb. Use of debtII. Degrees of Leveragea. Degree of operating leverageb. Degree of financial leveragec. Degree of combined leveraged. DOL equatione. DOF equationf. DCL equationg. What does this mean?h. How is DCL found?III. Definition of Capital StructureCurrent LectureLeverageI. 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 2iv. Price v. $100,000 vi. $100,000vii. Equity viii. 10,000 ix. 100,000x. Debt xi. 90,000 xii. 0xiii. Selling Pricexiv. 110,000 xv. 110,000xvi. Return xvii. 110,000xviii. -7,200xix. -90,000xx. 12,800xxi. -10,000xxii. 2,800xxiii. /10,000xxiv. 28%xxv. 110,000xxvi. -100,000xxvii. 10,000xxviii. /100,000xxix. 10%b. Debt is used to magnify equity, but if you borrow money, you’ll have to pay more backII. Degrees of Leveragea. Degree of operating leverage (DOL) = %change EBIT/%change salesb. Degree of financial leverage (DOF) = %change net income/%change EBITc. Degree of combined leverage (DCL) = %change net income/%change salesi. 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 timese. DOF = 19.31/10.06 = 1.92 timesf. DCL = 19.31/6.07 = 3.18 timesg. 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): cancelout EBITs = DCLi. 1.66 (DOL) x 1.92 (DOF) = 3.19 times (DCL)III. Capital Structure – the combination of debt & equity a company uses to finance its
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