1、16-1 Pearson Education Limited 2019Fundamentals of Financial Management, 12/eCreated by: Gregory A. Kuhlemeyer, Ph.D.Carroll College, Waukesha, WI16-2uDefine operating and financial leverage and identify causes of both. uCalculate a firms operating break-even (quantity) point and break-even (sales)
2、point . uDefine, calculate, and interpret a firms degree of operating, financial, and total leverage. uUnderstand EBIT-EPS break-even, or indifference, analysis, and construct and interpret an EBIT-EPS chart. uDefine, discuss, and quantify “total firm risk” and its two components, “business risk” an
3、d “financial risk.” uUnderstand what is involved in determining the appropriate amount of financial leverage for a firm.16-3uOperating LeverageuFinancial LeverageuTotal LeverageuCash-Flow Ability to Service DebtuOther Methods of AnalysisuCombination of Methods16-4uOne potential “effect” caused by th
4、e 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).16-5 Sales$10$11 $19.5Operating CostsFixed 7 2 14 Variable 2 7 3Operating Profit FC/total costs .78 .22 .82 FC/sales .70 .18 .7216-6uNow, subject each f
5、irm to a for next year.uWhich firm do you think will be more to the change in sales (i.e., show the largest percentage change in operating profit, EBIT)? ; ; .16-7 Sales$15 $16.5 $29.25Operating Costs Fixed 7 2 14 Variable 310.5 4.5Operating Profit * (EBITt - EBIT t-1) / EBIT t-116-8- for it, a 50%
6、increase in sales leads to a .uOur example reveals that it is a mistake to assume that the firm with the largest absolute or relative amount of fixed costs automatically shows the most dramatic effects of operating leverage.uLater, we will come up with an easy way to spot the firm that is most sensi
7、tive to the presence of operating leverage.16-9uWhen studying operating leverage, “profits” refers to operating profits before taxes (i.e., EBIT) and excludes debt interest and dividend payments.- A technique for studying the relationship among fixed costs, variable costs, sales volume, and . Also c
8、alled cost/volume/profit (C/V/P) analysis.16-100 1,000 2,000 3,000 5,000 6,000 7,000250100 5016-11How to find the quantity break-even point: EBIT = ( ) - ( ) - EBIT = ( - ) - 16-12Breakeven occurs when EBIT = 0 ( - ) - = EBIT ( - ) - = 0 ( - ) = = / ( - ) a.k.a. Unit Contribution Margin16-13How to f
9、ind the sales break-even point: = + () = + ( )( ) or = / 1 - ( / S) * Refer to text for derivation of the formula16-14Basket Wonders (BW) wants to determine both the when:are uBaskets are sold for uVariable costs are 16-15Breakeven occurs when: = / ( - ) = / ( - ) = = ( )( ) + = ( )() + = 16-160 1,0
10、00 2,000 3,000 5,000 6,000 7,000250100 5016-17 at Q units of output (or sales)- The percentage change in a firms operating profit (EBIT) resulting from a 1 percent change in output (sales).=Percentage change in operating profit (EBIT)Percentage change in output (or sales)16-18= ( - ) ( - ) - = - 16-
11、19= - - - =EBIT + EBIT16-20Lisa Miller wants to determine the at . As we did earlier, we will assume that:are uBaskets are sold for uVariable costs are 16-21=-=-=16-22=-=16-2316-24uDOL is a quantitative measure of the “sensitivity” of a firms operating profit to a change in the firms sales.uThe clos
12、er that a firm operates to its break-even point, the higher is the absolute value of its DOL.uWhen comparing firms, the firm with the highest DOL is the firm that will be most “sensitive” to a change in sales.16-25uDOL is only of business risk and becomes “active” .uDOL the variability of operating
13、profits and, hence, business risk.16-26=16-27=16-28=16-29.16-30uFinancial leverage is acquired by choice.uUsed as a means of increasing the return to common shareholders.16-31Calculate for a given level of at a given financing structure.( - I) (1 - t) - Pref. Div.# of Common Shares=16-32uAll C.S. so
14、ld at $20/share (50,000 shares)uAll debt with a coupon rate of 10%uAll P.S. with a dividend rate of 9%16-33*Interest 0 0EBT $500,000 $150,000Taxes (30% x EBT) 150,000 45,000EAT $350,000 $105,000Preferred Dividends 0 0# of Shares 100,000 100,000* A second analysis using $150,000 EBIT rather than the
15、expected EBIT.16-3416-35*Interest 100,000 100,000EBT $400,000 $ 50,000Taxes (30% x EBT) 120,000 15,000EAT $280,000 $ 35,000Preferred Dividends 0 0# of Shares 50,000 50,000* A second analysis using $150,000 EBIT rather than the expected EBIT.16-36Indifference pointbetween andfinancing16-37*Interest 0
16、 0EBT $500,000 $150,000Taxes (30% x EBT) 150,000 45,000EAT $350,000 $105,000Preferred Dividends 90,000 90,000# of Shares 50,000 50,000* A second analysis using $150,000 EBIT rather than the expected EBIT.16-38Indifference pointbetween andfinancing16-39. Only a smallprobability that EPS willbe less i
17、f the debtalternative is chosen.16-40. A much largerprobability that EPS willbe less if the debtalternative is chosen.16-41 at EBIT of X dollars- The percentage change in a firms earnings per share (EPS) resulting from a 1 percent change in operating profit.=Percentage change in earnings per share (
18、EPS)Percentage change in operating profit (EBIT)16-42 EBIT of $X=- - / (1 - ) 16-43 * =- - / (1 - )* The calculation is based on the expected EBIT=16-44 * =- - / (1 - ) * The calculation is based on the expected EBIT=/ $400,000=16-45 * =- - / (1 - ) * The calculation is based on the expected EBIT=/
19、$400,000=16-46financing will lead to the greatest variability in earnings per share based on the DFL.uThis is due to the tax deductibility of interest on debt financing.Which financing method will have the 16-47uDebt increases the probability of cash insolvency over an all-equity-financed firm. For
20、example, our example firm must have EBIT of at least $100,000 to cover the interest payment.uDebt also increased the variability in EPS as the DFL increased from 1.00 to 1.25.16-48 is a measure of relative is a measure of relative uThe difference, , is a measure of relative = + 16-49 at Q units (or
21、S dollars) of output (or sales)- The percentage change in a firms earnings per share (EPS) resulting from a 1 percent change in output (sales).=Percentage change in earnings per share (EPS)Percentage change in output (or sales)16-50 S dollarsof sales= () x ( )= + FC- - / (1 - ) Q units () () - FC -
22、- / (1 - ) =16-51Lisa Miller wants to determine the at As we did earlier, we will assume that:are uBaskets are sold for uVariable costs are 16-52 S dollarsof sales= + $100,000- - / (1 - ) = () x ()= () x ( * ) = =*Note: No financial leverage.16-53 S dollarsof sales= + $100,000- - / (1 - ) = () x ()=
23、 () x ( * ) = =*Note: Calculated on Slide 16-44.16-54Compare the expected EPS to the DTL for the common stock equity financing approach to the debt financing approach. 16-55uFirms must first analyze their uThe and the expected future cash flows, : debt principal and interest payments, lease payments
24、, and preferred stock dividends.16-56Indicates a firms ability to cover interest charges.Income StatementRatiosCoverage RatiosA ratio value equal to 1indicates that earningsare just sufficient tocover interest charges.16-57 + Indicates a firms ability to cover interest expenses and principal payment
25、s.Income StatementRatiosCoverage RatiosAllows us to examine theability of the firm to meetall of its debt payments.Failure to make principalpayments is also default.16-58Make an examination of the for Basket Wonders when Compare the equity and the debt financing alternatives. : remain at are made ye
26、arly for 10 years16-59Compare the interest coverage and debt burden ratios for equity and debt financing. 16-60Firm B has a much smaller probabilityof failing to meet its obligations than Firm A.16-61uA single ratio value cannot be interpreted identically for all firms as some firms have greater deb
27、t capacity.uAnnual financial lease payments should be added to both the numerator and denominator of the debt-service coverage ratio as financial leases are similar to debt.uThe debt-service coverage ratio accounts for required annual principal payments.16-62uOften, firms are compared to peer instit
28、utions in the same industry.uLarge deviations from norms must be justified.uFor example, an industrys median debt-to-net-worth ratio might be used as a benchmark for financial leverage comparisons.16-63uFirms may gain insight into the financial markets evaluation of their firm by talking with:uInvestment bankersuInstitutional investorsuInvestment analystsuLenders16-64uFirms must consider the impact of any financing decision on the firms security rating(s).65谢谢！谢谢！
