财务管理英文Chapter16.pptVIP

Chapter 16 Operating and Financial Leverage Operating and Financial Leverage Operating Leverage Financial Leverage Total Leverage Cash-Flow Ability to Service Debt Other Methods of Analysis Combination of Methods The Du Pont Identity Breaks ROE into three parts: operating efficiency asset use efficiency financial leverage Operating Leverage One potential “effect” caused by the presence of operating leverage is that a change in the volume of sales results in a “more than proportional” change in operating profit (or loss). Break-Even Analysis Break-Even Analysis -- A technique for studying the relationship among fixed costs, variable costs, profits, and sales volume. When studying operating leverage, “profits” refers to operating profits before taxes (i.e., EBIT) and excludes debt interest and dividend payments. Break-Even Chart QUANTITY PRODUCED AND SOLD Break-Even (Quantity) Point Break-Even Point -- The sales volume required so that total revenues and total costs are equal; may be in units or in sales dollars. Breakeven occurs when EBIT = 0 Q (P - V) - FC = EBIT QBE (P - V) - FC = 0 QBE (P - V) = FC QBE = FC / (P - V) Operating Leverage The degree of operating leverage (DOL) measures how sensitive a firm (or project) is to its fixed costs. Operating leverage increases as fixed costs rise and variable costs fall. The degree of operating leverage is given by: Degree of Operating Leverage (DOL) Degree of Operating Leverage -- The percentage change in a firm’s operating profit (EBIT) resulting from a 1 percent change in output (sales). Operating Leverage Interpretation of the DOL Interpretation of the DOL DOL is a quantitative measure of the “sensitivity” of a firm’s operating profit to a change in the firm’s sales. The closer that a firm operates to its break-even point, the higher is the absolute value of its DOL. When comparing firms, the firm with the highest DOL is the firm that will be most “sensitive” to a change in sales. DOL and Business Risk