ENGL291 Lecture Notes - Lecture 2: Financial Analyst, Retained Earnings, Standard Deviation

• School: University of Waterloo
• Department: English
• Course: ENGL291
• Professor: unknown

Document Summary

Course: master of business administration level i term ii. James horne has defined leverage as the employment of funds which the firm has to pay a fixed cost or fixed return . If a firm is not required to pay fixed cost or fixed return there will be no leverage. Generally leverage is used to increase the return to equity shareholders. In other words increasing leverage increases the size of the return and increases the risk. The risk refers to the degree of uncertainty associated with the firms ability to pay its fixed payments obligation. Thus leverage calculations are greatly related with the change in the sales volume of the levels of operating income. Operating leverage arises from the existence of fixed operating expenses. So the degree of operating leverage depends upon the amount of fixed costs. If fixed costs are high even a small decline in sales can lead to a large decline in operating income.