财务管理基础课件：Operating and Financial Leverage

OperatingandFinancialLeverage

ChapterOutlineWhatisleverage?Break-evenanalysisOperatingleverageFinancialleverageCombinedleveragePotentialprofitsorincreasedrisk?WhatisLeverage?UseofspecialforcesandeffectstomagnifyorproducemorethannormalresultsfromagivencourseofactionCanproducebeneficialresultsinfavorableconditionsCanproducehighlynegativeresultsinunfavorableconditionsLeverageinaBusinessDeterminingtypeoffixedoperationalcostsPlantandequipmentEliminateslaborinproductionofinventoryExpensivelaborLessensopportunityforprofitbutreducesriskexposureDeterminingtypeoffixedfinancialcostsDebtfinancingSubstantialprofitsbutfailuretomeetcontractualobligationscanresultinbankruptcySellingequityReducespotentialprofitsbutminimizesriskexposure

OperatingLeverageExtenttowhichfixedassetsandassociatedfixedcostsareutilizedinabusinessOperationalcostsinclude:FixedVariableSemivariableBreak-EvenChart:LeveragedFirmBreak-EvenAnalysisThebreak-evenpointisat50,000units,wherethetotalcostsandtotalrevenuelinesintersectUnits=50,000.TotalVariableFixedCostsTotalCostsTotalRevenueOperatingIncomeCosts(TVC)(FC)(TC)(TR)(loss)(50,000X$0.80)(50,000X$2)$40,000$60,000$100,000$100,0000

Break-EvenAnalysis(cont’d)Thebreak-evenpointcanalsobecalculatedby:Fixedcosts=Fixedcosts=FC

ContributionmarginPrice–VariablecostperunitP–VC i.e.$60,000=$60,000=50,000units

$2.00-$0.80$1.20Volume-Cost-ProfitAnalysis:LeveragedFirmTable5-2AConservativeApproachSomefirmschoosenottooperateathighdegreesofoperatingleverageMoreexpensivevariablecostsmaybesubstitutedforautomatedplantandequipmentThisapproachmaycutintopotentialprofitabilityofthefirmBreak-EvenChart:

ConservativeFirmVolume-Cost-ProfitAnalysis:ConservativeFirmTable5-3TheRiskFactorFactorsinfluencingdecisiononmaintainingaconservativeorleveragedpositioninclude:EconomicconditionCompetitivepositionwithinindustryFutureposition–stabilityversusmarketleadershipMatchinganacceptablereturnwithadesiredlevelofriskCashBreak-EvenAnalysisDealswithcashflowsratherthanaccountingflowsHelpsinanalyzingtheshort-termoutlookofafirmExamplesofnoncashitemsthatareexcluded:DepreciationCreditsalesCreditpurchaseofmaterialsDegreeofOperatingLeverage(DOL)PercentagechangeinoperatingincomeasaresultofapercentagechangeinunitssoldComputedonlyoveraprofitablerangeofoperationsMorewhenitiscomputedclosertoBEPDOL=PercentchangeinoperatingincomePercentchangeinunitvolumeOperatingIncomeorLossComputationofDOLLeveragedfirm:DOL=Percentchangeinoperatingincome=$24,000X100Percentchangeinunitvolume$36,000

20,000X10080,000=67%=2.725%Conservativefirm:DOL=Percentchangeinoperatingincome=$8,000X100 Percentchangeinunitvolume$20,000

20,000X10080,000=40%=1.625%AlgebraicFormulaforDOL

DOL=Q(P–VC)

,Q(P–VC)–FCWhere,Q=QuantityatwhichDOLiscomputedP=PriceperunitVC=VariablecostsperunitFC=FixedcostsFortheleveragedfirm,assumeQ=80,000,withP=$2,VC=$0.80,andFC=$60,000:DOL=80,000($2.00-$0.80);80,000($2.00-$0.80)-$60,000=80,000($1.20)=$96,000;80,000($1.20)-$60,000$96,000-$60,000DOL=2.7LimitationsofAnalysisAssumptionofexistenceofconstantorlinearfunctionforrevenuesandcostsasvolumechangesMaynotholdgoodinrealworldPriceweakeningtocaptureincreasingmarketCostoverrunswhenmovedbeyondoptimum-sizeoperationRelationshipsarenotsofixedasassumedNonlinearBreak-EvenAnalysisAssumptionofexactlinearrelationdoesnotholdgoodinrealityFinancialLeverageReflectstheamountofdebtusedinthecapitalstructureofthefirmDetermineshowtheoperationistobefinancedDeterminestheperformancebetweentwofirmshavingequaloperatingcapabilitiesBALANCESHEETAssetsLiabilitiesandNetWorthOperatingleverageFinancialleverageImpactonEarningsExaminetwofinancialplansforafirm,where$200,000isrequiredtocarrytheassets

TotalAssets=$200,000

PlanA(leveraged)PlanB(conservative)Debt(8%interest)$150,000($12,000interest)$50,000($4,000interest)

Commonstock50,000(8000sharesat$6.25)150,000(24,000sharesat$6.25)

Totalfinancing$200,000$200,000ImpactofFinancingPlanonEarningsperShareTable5-5FinancingPlansandEarnings

perShareDegreeofFinancialLeverageDFL=PercentchangeinEPSPercentchangeinEBITForthepurposeofcomputation,itcanberestatedas:

DFL=EBIT.EBIT–IDFLfortwoplanscanbecalculatedusingvaluesfromTable5-5PlanA(Leveraged): DFL=EBIT=$36,000=$36,000=1.5

EBIT–I$36,000-$12,000$24,000PlanB(Conservative): DFL=EBIT=$36,000=$36,000=1.1 EBIT–I$36,000-$4,000$32,000LimitationstoUse

ofFinancialLeverageBeyondapoint,debtfinancingisdetrimentaltothefirmLenderswillperceiveagreaterfinancialriskCommonstockholdersmaydrivedownthepriceRecommendedforfirmsthatare:InanindustrythatisgenerallystableInapositivestageofgrowthOperatinginfavorableeconomicconditionsCombiningOperating

andFinancialLeverageCombinedleverage:whenbothleveragesallowafirmtomaximizereturnsOperatingleverage:AffectstheassetstructureofthefirmDeterminesthereturnfromoperationsFinancialleverage:Affectsthedebt-equitymixDetermineshowthebenefitsreceivedwillbeallocatedCombinedLeverageInfluence

ontheIncomeStatementLastitemunderoperatingleverage,operatingincome,becomestheinitialitemfordeterminingfinancialleverage“Operatingincome”and“Earningsbeforeinterestandtaxes”areoneandthesame,representingthereturntotheownersbeforeinterestandtaxesarepaidCombiningOperating

andFinancialLeverageOperatingandFinancial

LeverageTable5-7DegreeofCombinedLeverageUsestheentireincomestatementShowstheimpactofachangeinsalesorvolumeonbottom-lineearningspershareDCL=

PercentagechangeinEPS