FIN exam 4

Capital structure

Determining the sources of funds (debt and equity) that will be used to purchase long-term assets is called _______ ________.

Chapter 20. Operating Leverage & Financial Leverage

End of

Variable expenses

_____ _____ do change. They change with output. If you make more pizzas in your restaurant the expenses go up.

Fixed expenses

_____ _____ do not change. Regardless of how much output I have - rent stays the same.

there will be no change in costs

A firm has 100% Fixed Costs; What will happen to this firm's COSTS if sales increase by 10%?

profits change more than 10%; they are magnified

A firm has 100% Fixed Costs; What will happen to this firm's PROFITS if sales increase by 10%?

costs increase

A firm has zero Fixed Costs; What will happen to this firm's COSTS if sales increase by 10%?

no change

A firm has zero Fixed Costs; What will happen to this firm's PROFITS if sales increase by 10%?

high

A firm with 100% Fixed Costs has ____low____ / ____high____ operating leverage.

bank

A firm with high debt has low equity and they are less accountable to shareholders. They are primarily accountable to their _____.

shareholders'

A firm with low debt has equity through _____ investments or their own investment.

low

A firm with zero [none, zip] Fixed Costs has ____low____ / ____high____ operating leverage.

trade-off, debt

As a result, firms face a ____ - ___ when using ____.

magnify

By using a lever, you _______ your ability, skill and results.

yes

Can a firm with 100% Fixed Costs increase their PROFITS with increased sales?

source of funds (debt, d and equity, s)

Capital structure is concerned with _______.

managers; capital structure

Control over financial leverage is largely determined by a firm's _____ . This is called _____ _____ .

bankruptcy, risk

Debt had the disadvantage of increasing the chance of _________. This means higher _____.

magnifies SH return

Debt has the advantage of _____.

fixed

Debt has the disadvantage of being a _____ cost.

deduction, taxes

Debt is cheaper than equity because a firm uses debt as a tax ____. That means you end up paying lower _____.

debt

Financial leverage is caused by a firm using ____ to raise funds.

complete

Firms often have _____ control over financial leverage.

little to no

Firms often have _______ control over operating leverage.

cont . . .

Fixed expenses vs variable expenses.

interest on loans

Fixed financial cost is a fancy way of saying _____ on _____.

shareholders

Having higher debt means paying the bank is a higher priority than paying _______.

fixed

High operating leverage is when a firm chooses to use high _____ costs and low variable costs.

bankrupt

If a firm does not pay their bank they go _____.

high, high, high

If you finance with a _____ percentage of debt, you will have _____ financial leverage and _____ risk.

low, low, low

If you finance with a _____ percentage of debt, you will have _____ financial leverage and _____ risk.

high, high, high

If you have ______ fixed costs, you will have ______ operating leverage and ______ risk.

low, low, low

If you have ______ fixed costs, you will have ______ operating leverage and ______ risk.

operating, financial

In finance, there are 2 types of leverage:___ & ___

not risky I don't have to bear the risk that would come with Fixed Costs. Low FC is very Low Risk

Is this business risky? Why?

risky I have to bear the risk that would come with Fixed Costs. High FC is High Risk. . . . . . . .A firm with all fixed costs, all salaried employees, always has to pay their employees $50. If sales go up by 10% I still pay the fixed costs, salaries total $50. If sales go down by 10% I still pay the fixed costs, salaries total $50.

Is this business risky? Why?

fixed

Low operating leverage is when a firm chooses to use low _____ costs and high variable costs.

Working capital management

Managing the firm's current assets and current liabilities is called ______ ______.

Same questions but now Zero Variable Costs. All costs are Fixed Costs

Now The Opposite

fixed cost; high

Operating leverage is caused by _____ _____ so this firm has __high__ / __low__ operating leverage.

fixed cost; low

Operating leverage is caused by _____ _____ so this firm has __high__ / __low__ operating leverage.

fixed costs

Operating leverage is caused by ________

industry

Operating leverage is largely determined by a firm's ______.

fixed

Salaried employees is a _____ worker expense.

Sales . . . . . . . . . . . . . . . . . 110 Variable Costs . . . . . . . . . (60) Fixed Costs . . . . . . . . . . . . . .0. . . . Zero Fixed Costs __________________________________ Net Income . . . . . . . . . . . . 50

Sales . . . . . . . . . . . . . . . . . 100 Variable Costs . . . . . . . . . (50) Fixed Costs . . . . . . . . . . . . . .0. . . . Zero Fixed Costs __________________________________ Net Income . . . . . . . . . . . . 50 If my sales increase 10 units, 110, and my Variable Costs increase 10 units, (60), then the Net Income will be ______ .

Sales . . . . . . . . . . . . . . . . . 110 Variable Costs . . . . . . . . . . 0 Fixed Costs . . . . . . . . . . .(50). . . . 100% Fixed Costs __________________________________ Net Income . . . . . . . . . . . .60

Sales . . . . . . . . . . . . . . . . . 100 Variable Costs . . . . . . . . . . .0 Fixed Costs . . . . . . . . . . . (50). . . . 100% Fixed Costs __________________________________ Net Income . . . . . . . . . . . . 50 If my sales increase 10 units, 110, and my Fixed Costs do not change, (50), then the Net Income will be ______ .

increased returns; bankruptcy and increased risk

The firm wants the advantage of ___ ____ that debt will bring. But, the firm has to face the disadvantage of _____ and _____ _____.

Capital budgeting

The process of selecting long-term investments is called ______ ______.

variable

The rent is still fixed but materials and inventory used to produce are _____ .

return and risk

These two types of leverage will magnify ______&_______

Financial Leverage

Use of another firm's funds in return for agreeing to pay a fixed return for the funds

Operating Leverage

Use of fixed resources instead of variable resources to produce a level of output. ex: salary vs hourly wages

fixed

Using debt to raise funds causes a ____ financing cost.

Sales change but Variable Costs change along side them. You net out the PROFIT

Why can't a firm with zero Fixed Costs increase their PROFITS with increased sales? Why can't a firm with zero Fixed Costs decrease their PROFITS with decreased sales?