financial management ii

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powerpoint presentation financial management ii part i capital structure policy and leverage 1 by : kibrysfaw getahun meaning of capital structure capital structure (what?) refers to the mix (or proportion) of a firm’s permanent long-term source of financing represented by debt, preferred stock, and common equity that is used to finance the firm’s assets. represent the proportionate relationship between debt and equity (i.e. debt-equity mix or ratio): where equity includes paid-up share capital, share premium and reserves and surplus (retained earnings). 2 meaning of capital structure 3 leverage: business risk and financial risk 4 leverage & capital structure a sound financial decision must consider the broad coverage of the financial mix (capital structure), total amount of capital (capitalization) and cost of capital. deciding the debt-equity mix plays a major role in the part of the value of the company and market value of the shares. the debt equity mix of …

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debt payments. 7 leverage meaning of operating leverage… is concerned with the relationship between the firm’s sales and its earnings before interest and taxes (ebit) or operating profits. when costs of operations (such as cost of goods sold and operating expenses) are largely fixed, small changes in revenue will lead to much larger changes in ebit. the use of fixed operating costs to magnify the effects of changes in sales on the firm’s earnings before interest and taxes. 8 leverage in physics, leverage implies the use of a lever to raise a heavy object with a small force. in politics, if people have leverage, their smallest word or action can accomplish a great deal. 8 illustration 1: a firm sells product for br. 100 per unit, has variable operating costs of br.50 and fixed operating cost (foc) of br. 50,000 per year. show the various levels of ebit that would …

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bit % q (sales) where: dol = degree of operating leverage = change ebit = profits before interest and taxes (operating profits) leverage the above ratio answers the following type of question: if sales are increased by 1%, by what percentage will operating profit increase, given a certain degree of operating leverage? 11 example: refer to the above example table 3, that to illustrate operating leverage, and determine dol. solution: case 1: dol at 2000 units(q) = + 50,000/50,000 = +100% = 2 sales level + 100,000/200,000 +50% case 2: dol at 2000 units(q) = -50,000/50,000 = -100% = - 2 sales level -100,000/200,000 -50% leverage interpretation: a one percent change (increase or decrease) in sales results into a 2% change in ebit as long as dol is greater than 1, there is operating leverage formula 2: dol at base level ebit = q x(p-v) = contribution margin q x …

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0). 16 operating leverage in physics, leverage implies the use of a lever to raise a heavy object with a small force. in politics, if people have leverage, their smallest word or action can accomplish a great deal. 16 substituting q = 1,000, p = birr10, vc = birr5, and fc = birr2,500 the dol value of 2.0 means that at abc a change in sales volume results in an ebit change that is twice as large in percentage terms, e.g. a 50% change in sales would lead to a 100% (50% * 2.0) change in ebit. 17 operating leverage in physics, leverage implies the use of a lever to raise a heavy object with a small force. in politics, if people have leverage, their smallest word or action can accomplish a great deal. 17 financial leverage. financial leverage is the use of fixed costs in the financing of the …

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60) financial leverage. the degree of financial leverage (dfl) is the numerical measures of the firm’s financial leverage. dfl also called the coefficient of fl is the percentage change in eps (dependent variable) that results from a given percentage change in ebit (independent variable). 20 refer the above example and find dfl case 1; dfl at br.10,000 ebit = 5.80 -3.20 / 3.2 = 2.6 /3.2 = +81.25% = 2.03 4000/10,000 0.4 +40% case 2; dfl at br.10,000 ebit = 3.20 -5.80 / 3.2 = -2.6 /3.2 = -81.25% = 2.03 4000/10,000 0.4 -40% or financial leverage. 21 the degree of financial leverage (dfl) measures the responsiveness of eps to changes in operating profits. the degree of financial leverage is the percentage change in earnings per share (eps) relationship can be symbolically expressed as follows: financial leverage. assume nile company’s has earned profits before interest and taxes of br.10,000 in …

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powerpoint presentation financial management ii part i capital structure policy and leverage 1 by : kibrysfaw getahun meaning of capital structure capital structure (what?) refers to the mix (or proportion) of a firm’s permanent long-term source of financing represented by debt, preferred stock, and common equity that is used to finance the firm’s assets. represent the proportionate relationship between debt and equity (i.e. debt-equity mix or ratio): where equity includes paid-up share capital, share premium and reserves and surplus (retained earnings). 2 meaning of capital structure 3 leverage: business risk and financial risk 4 leverage & capital structure a sound financial decision must consider the broad coverage of the financial mix (capital structure), total amount of capital (capit...

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