公司财务-leverage-.pptVIP

Leverage Use of fixed costs to increase profitability Magnify returns by taking on additional risks. Operating leverage Financial leverage Operating Leverage Reflects the extent to which fixed assets and associated fixed costs are utilised Fixed operating costs – do not vary as sales volume changes. Depreciation. Insurance. Salaries. Change in volume results in a more than proportionate change in operating profit Airlines. Hotel. Operating Leverage How much will changes in volume affect profits and costs At what point does the firm break even What is the most efficient level of fixed assets to employ in the firm. Double edged sword. Greater variability of earnings. Operating Leverage Firm F Firm V Fixed Costs Proportion 0.78 0.22 Sales 10000 10000 Fixed cost 7000 2000 Variable cost 2000 7000 Operating profit 1000 1000 Sales 15000 15000 Fixed cost 7000 2000 Variable cost 3000 10500 Operating profit 5000 2500 Degree of Operating Leverage Percentage change in operating profit to percentage change in volume Different at different volumes DOL = Q(P-V)/ (Q(P-V)-FC) (Sales –variable cost) divided by (sales –variable costs –fixed costs) High Operating Leverage Fixed Costs = Rs. 60000 Variable Costs = Rs.0.80 per unit Revenues = Rs. 2 per unit BE = Fixed Costs / Contribution per Unit = FC / (Price – VC) = 60000 / (2- 0.8) = 50000 units Low Operating Leverage Fixed Costs = Rs. 12000 Variable Costs = Rs.1.60 per unit Revenues = Rs. 2 per unit BE = Fixed Costs / Contribution per Unit = FC / (Price – VC) = 12000 / (2- 1.6) = 30000 units Volume-cost-profit analysis: Leveraged firm Volume-cost-profit analysis: Conservative firm Operating Income or Loss Financial leverage Reflects the extent to which debt is used in meeting the required funds Use of fixed cost financing (Debt) Matter of choice What will be the impact of changes in operating prof