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9 Feb 2018

What is operating leverage? How if at all, is it similar to financial leverage? If a firm has high operating leverage, would you expect it ot have high or low financial leverage? explain your reasoning?

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Trinidad Tremblay
Trinidad TremblayLv2
11 Feb 2018
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Related questions

Let's assume a company has both high operating leverage and high financial leverage:
How would you characterize the level of risk assumed by the company?
How would you consider investing in a company that has both high operating and financial leverage? please explain

Explain why you might expect to observe a negative correlation between financial leverage and operating leverage.

State if each statement is true or false and explain.

Because of the risk-return trade-off.

If a firm is naturally risky because of its operating leverage, the firm may not want to add financial risk.

Because of the WACC.

If a firm is relatively low risk because of low operating leverage, the firm may want to add financial risk.

Note: The correct answer is NOT false, true, false, false

1.) What is operating leverage? How, if at all, is it similar to financialleverage? If a firm has high operating leverage would you expect it tohave high or low financial leverage? Explain your reasoning.

2.) Why might it make sense for a mature, slow-growth company to havea high debt ratio?

3.) FARO Technologies, whose products include portable 3D measure-ment equipment, recently had 17 million shares outstanding tradingat $42 a share. Suppose the company announces its intention to raise$200 million by selling new shares.a.What do market signaling studies suggest will happen to FARO’sstock price on the announcement date? Why?b.How large a gain or loss in aggregate dollar terms do market sig-naling studies suggest existing FARO shareholders will experienceon the announcement date?c.What percentage of the value of FARO’s existing equity prior tothe announcement is this expected gain or loss?d.At what price should FARO expect its existing shares to sell imme-diately after the announcement?

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