MGMT 3320 Chapter Notes - Chapter 5: Capital Structure, Shares Outstanding, Leveraged Buyout
30 Mar 2017
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By employing more capital assets and/or more debt the firm increases its leverage & risk. But also increases potential for greater returns to shareholders. Operating leverage: reflects extent to which capital assets & fixed costs are utilized in the business firm. As operations reach full production/sales capacity costs per unit decrease resulting in higher profits. Primarily affects the fixed charges on the balance sheet. Limited by assuming a constant/linear function exists for revenue and costs as volume changes. Not accounting for the timing of cash flows. Breakeven analysis: used to evaluate implications of heavy capital asset use. Contribution margin = price per unit variable cost per unit. Limitations of break-even: ignores timing of cash flows, ignores opportunity cost of having monies invested in assets and not available for other uses, ignores cash flows only accounting income is considered at this point. The risk factor greater leverage (higher risk) can be taken on:
