Corporate Finance CFA 一级重要知识点讲解讲师 : 胡瑾 1-10

Size: px

Start display at page:

Download "Corporate Finance CFA 一级重要知识点讲解讲师 : 胡瑾 1-10"

Leon Griffith
5 years ago
Views:

1 Corporate Finance CFA 一级重要知识点讲解讲师 : 胡瑾 1-10

2 Leverage 2-10

3 Leverage and risk Leverage is the use of fixed costs, operating or financial, in a company s cost structure. It increases the risk and potential return of a firm s earnings and cash flows. Operating leverage results from fixed operating cost. Financial leverage results from the use of debt financing and its associated fixed costs. Business risk is the risk associated with operating earnings (EBIT) and results from a combination of sales risk and operating risk. Sales risk:the uncertainty with respect to the price and quantity of goods and services; Operating risk: risk attributed to the operating cost structure, the greater the fixed costs relative to variable costs, the greater the operating risk. Financial risk is reflected in the greater variability of EPS compared to the variability of operating earnings (EBIT) as a result of using debt in the firm s capital structure. 3-10

4 Operating Leverage Degree of operating leverage (DOL) Definition: the percentage change in operating income (EBIT) that results from a given percentage change in units sold ΔEBIT percentage change in EBIT DOL= = EBIT percentage change in units sold ΔQ Q elasticity Equation: DOL Q( P VC) S TVC Q ( P VC ) FC S TVC FC 4-10

5 Financial Leverage Degree of financial leverage (DFL) Definition: the ratio of the percentage change in the net income (EPS) to the percentage change in EBIT Equation: DFL= percentage change in EPS percentage change in EBIT ΔEPS = EPS ΔEBIT EBIT When interest is zero, DFL=1. There is no financial leverage. DFL EBIT EBIT Interest 5-10

6 Financial Leverage Degree of total leverage (DTL) Definition:this ratio combines the degree of DOL and DFL and measures the sensitivity of EPS to change in sales DTL DOL DFL DTL % EBIT % sales % EPS % EBIT % EPS % sales Equation: DTL Q( P VC) S TVC Q ( P VC ) FC I S TVC FC I 6-10

7 Leverage and risk The use of debt in a company s capital structure : reduces net income due to the added interest expense increase equity owner s ROE increase the rate of change (risk) for ROE. Whether to use leverage depends on: Profitability Cost of the funds 7-10

8 Operating leverage Degree of operating leverage is best described as a measure of the sensitivity of: A. net earnings to changes in sales. B. fixed operating costs to changes in variable costs. C. operating earnings to changes in the number of units produced and sold. Solution: C. The degree of operating leverage is the elasticity of operating earnings with respect to the number of units produced and sold. As an elasticity, the degree of operating leverage measures the sensitivity of operating earnings to a change in the number of units produced and sold. 8-10

9 Leverage Consider two companies that operate in the same line of business and have the same degree of operating leverage: the Basic Company and the Grundlegend Company. The Basic Company and the Grundlegend Company have, respectively, no debt and 50 percent debt in their capital structure. Which of the following statements is most accurate? Compared to the Basic Company, the Grundlegend Company has: A. a lower sensitivity of net income to changes in unit sales. B. the same sensitivity of operating income to changes in unit sales. C. the same sensitivity of net income to changes in operating income. Solution: B. Grundlegend's degree of operating leverage is the same as Basic Company's, whereas Grundlegend's degree of total leverage and degree of financial leverage are higher. 9-10

10 Leverage calculation If Jayco's sales increase by 10%, Jayco's EBIT increases by 15%. If Jayco's EBIT increases by 10%, Jayco's EPS increases by 12%. Jayco's degree of total leverage (DTL) are closest to: (Notes P71) A B C Solution: C. 15% DOL = = % 12% DFL = = % DTL DOL DFL

11 11-10

Financial reporting and analysis

Financial reporting and analysis CFA 二级重要知识点讲解讲师 : 韩霄 1-11 MM theory 2-11 Capital Structure Theory Capital Structure Theory MM theory 1958 No taxes, no costs of financial distress MM theory 1963 With

Corporate Finance CFA 一级重要知识点讲解 讲师 : 胡瑾 1-10

Corporate Finance CFA 一级重要知识点讲解讲师 : 胡瑾 1-10