Leverage is borrowing money to amplify the outcome of a deal. The financial crisis includes sub-prime mortgages‚ collateralized debt obligations‚ frozen credit markets‚ and credit default swaps. The way that leverage works in a normal deal is that someone can buy merchandise for 20‚000 and sell it to someone else for 11‚000 and they gain 1‚000 in profit. However‚ using leverage if the same person with 10‚000 goes to borrow 990‚000 it will give him 1‚000‚000. He will then go buy 100 boxes with his
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ACCT 509 GA1 Waverly a. (1) Waverly’s Operating Income Before Tax Per Unit Total for 60‚000 units Sales $36.00 $2‚160‚000 Variable Costs: Direct Materials $ 6.50 Direct Labor $10.00 Variable Overhead $ 5.80 Mktg‚ Distrib‚ & Admin $ 1.70 Total Variable Costs: $24.00 $1‚440‚000 Contribution Margin $12.00 $ 720‚000 Fixed Costs: Manufacturing Overhead $ 5.00 Mktg & Admin $ 4.50 Total Fixed Costs: $ 9.50 $ 570‚000 Operating
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A. Debt Management Ratios (Leverage Ratios) The extent to which a firm uses debt financing‚ or financial leverage‚ has three important implications: 1. By raising funds through debt‚ stockholders can maintain control of a firm while limiting their investment 2. Creditors look to the equity‚ or owner-supplied funds‚ to provide a margin of safety‚ so the higher the proportion of the total capital that was provided by stockholders‚ the less the risk faced by creditors 3. If the firm earns more
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also not charged on overdue account. Gemini Electronics’ debt ratio and debt equity ratio indicate that Gemini Electronics is more leveraged than the average firm in industry. The higher leverage in part explains Gemini Electronics poor financial performance relative to the electronics industry because the leverage commits Gemini Electronics to interest payments that must be paid regardless of economic and market conditions. The ratios indicate that Gemini Electronic has a higher cost of sales than
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considering a leverage recapitalization after a long history of conservative debt policy in an effort to make the company’s capital structure more stable and potentially increase the price of their stock. UST Inc. does not want to become a hostile takeover target‚ so they are taking on a large amount of debt and issuing dividends to shareholders. By issuing more debt and repurchasing stocks‚ they increase the dividends‚ which increases the leverage and the riskiness. Increasing the leverage and riskiness
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The variable cost per unit remains constant regardless of the change in the volume of activity. 2. How is cost behavior used to analyze risk and profitability for companies? What is the role of operating leverage? Cost behavior is used to analyze risk and profitability with operating leverage and shifting the cost structure. The cost structure should depend on sales growth expectations. A fixed cost structure should be used for expectations of revenues to increase; however if sales growth is ambiguous
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Capital-Structure Decision 11.21 Business and Financial Risk 11.22 Operating Leverage and its Effects on a Project’s Expected Rate of Return 11.23 Financial Leverage 11.24 Sales and Leverage 11.25 Effects of Debt on the Capital Structure 11.26 Tax and Bankruptcy Costs 11.27 The MM Capital Structure vs. The Tradeoff Theory of Leverage 11.28 Signaling Prospects Through Financing Decisions 11.29 Degree of Total Leverage 11.30 Dividend Theories 11.31 Dividend Growth Rate and the Effect of Changing
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Would such an increase in leverage be good for all companies? Why or why not? Leverage depends on the industry and the company’s policy. In most cases‚ especially for software companies such as Microsoft‚ they would tend to leverage less and save cash in hand that equals to their one year’s expenses (salary‚ overhead‚ etc.). Because such industries where rapid changes could occur‚ over leveraging would be riskier‚ whereas manufacturing companies would tend to leverage more compared to software
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debt ratios. 2. Which of the following events is likely to encourage a company to raise its target debt ratio? a. An increase in the corporate tax rate. b. An increase in the personal tax rate. c. An increase in the company’s operating leverage. d. Statements a and c are correct. ANSWER: A An increase in the tax rate would lower the after-tax cost of debt relative to equity; therefore‚ this would encourage a company to raise its target debt ratio. 3. Which of the following statements
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Share Price on Listed Firms In Kenya – A Case of Energy Listed Firms Kisgen‚ D. J. (2006). Credit Ratings and Capital Structure. Journal of Finance 61(3)‚ 1035-1072. Kraus‚ A. & Litzenberger‚ R. (1973). A state-preference model of optimal financial leverage. of external finance. Journal of Finance 52‚ 1131-1150. Lana‚ J.‚ Martins‚ F.F.‚ Marcon‚ R. and Xavier‚ W.G. (2013). The Impact of Cross-Listing on Firms Capital Structure: Evidence from Brazil. Leland‚ H.E.& David H. P. (1977). Information asymmetries
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