When a company's operational costs are relatively fixed, operating leverage magnifies how earnings before interest and taxes (EBIT) change in response to changes in sales, whereas financial leverage magnifies how earnings per share (EPS) change in response to changes in EBIT when the fixed cost is that of financing, specifically interest expenses. The principle risk that occurs because of elevated monetary leverage arises at times when the corporation’s ROA does not seems to be increased the curiosity on the debit, that really lessens a corporation’s return on equity along with the productivity and effectiveness. (Periasamy)
What is the degree of total leverage?
The degree of total leverage is the relative variation in net revenue related with a specified variation in incomes. It combines the degree of operating leverage and the degree of financial leverage.
Question #2
What is (EBIT-EPS) analysis? What is the indifference curve?
This is a tool organizations use to examine the best ratio of debt and equity that should be used to fund the business' assets and activities.
What is the indifference curve?
An indifference curve symbolizes a system of combinations between two different economic goods, between which an individual would be theoretically indifferent regardless of which combination he/she received. (Eugene F. Brigham)
How is risk factored into the EBIT-EPS analysis?
Risk is factored by two measures: The financial breakeven point from EBIT-axis intercept and by the use of financial leverage reflected in the slope of the indifference curve
What are basic shortcomings of EBIT's analysis?
This model emphasizes on the intensification of incomes rather than on the intensification of share price
Questions #3
What is investment banking?
Investment banking is a specific division of banking related with the provision of finance for governments, companies and other individuals.
How would an investment banker assist an organization in going public?
An Investment Banker would guide the organization concerning its appraisals and fixing the issue price. He would also contribute in timing the concern.
As a chief financial officer, what information would you need to select an investment banker?
As a Chief Financial Officer, CFO should pay attention on the history of concluded similar transaction within the industry. (Joshua Rosenbaum)
Questions #4
Discuss WACC, what is it, how is it calculated, why is it used
Weighted average cost of capital is a determination of a firm's cost of capital in which each type of capital is equitably weighted
Why WACC is used
WACC is used to provide a discount rate for a financed project or development, since the cost of funding the capital is a rational price tag to put on the asset. (AHUJA)
How WACC is calculated
Calculation of WACC involves use of the formula below
Where:
Tc = corporate tax rate E = market value of the firm's equity
Rd = cost of debt D = market value of the firm's debt
E/V = percentage of financing Re = cost of equity
V = E + D = market value of the business’s financing
Works Cited
AHUJA, NARENDER L., DAWAR, VARUN, ARRAWATIA, RAKESH. CORPORATE FINANCE. PHI Learning Pvt. Ltd, 2016.
Eugene F. Brigham, Joel F. Houston. Fundamentals of Financial Management, Concise Edition. 9th. London: Cengage Learning, 2016.
Joshua Rosenbaum, Joshua Pearl. Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions. John Wiley & Sons,, 2013.
Periasamy. Financial Management. 2nd. New York: Tata McGraw-Hill Education, 2009.
