| 
  • If you are citizen of an European Union member nation, you may not use this service unless you are at least 16 years old.

  • Browse and search Google Drive and Gmail attachments (plus Dropbox and Slack files) with a unified tool for working with your cloud files. Try Dokkio (from the makers of PBworks) for free. Now available on the web, Mac, Windows, and as a Chrome extension!

View
 

financial leverage

Page history last edited by Brian D Butler 10 years, 11 months ago

 

 

 

 

 

 

Table of Contents:


 

There are two important types of leverage to consider

 

1.  financial leverage - amount of debt that the firm must first pay back before there is any money left over for the  shareholders (debt vs. equity analysis)

2.  operating leverage - amount of fixed costs that the firm must cover in order to start making a profit (fixed costs vs. variable costs analysis). 

 

Both of these factors are related to the risk of a firm, and have the potential to magnify potential returns for good performance, and punish the firm for poor performance. 

 

 

Financial Leverage:

 

Compares the amount of debt that the firm must first pay back before there is any money left over for the  shareholders (debt vs. equity analysis).

 

Financial leverage tools of evaluation measure the likelihood that a company will default on their debt obligations.   If a firm adds too much debt (which they have an incentive to do because debt financing is cheaper due to tax advantages of interest being deductible), then the ratios are there to alert bankers and lenders that the firm is entering the danger zone, and that some loans might want to be called in, and further loans might be canceled.  These ratios are meant to be warning signs before bankruptcy.

 

Debt Ratio:  total debt/ total assets

Debt / Equity ratio:

 

Times Interest earned ratio (TIE):

 

 

 

 

Links from GloboTrends

 

  • pageleverage
    types of leverage to consider 1. financial leverage - amount of debt that the firm must first pay back before there is any money left over for the shareholders (debt vs. equity analysis) 2. o…
    brian edited 3 mos ago
  • pageoperating leverage
    types of leverage to consider 1. financial leverage - amount of debt that the firm must first pay back before there is any money left over for the shareholders (debt vs. equity analysis) 2. o…
    brian edited 7 mos ago
  • pagefinancial leverage
    types of leverage to consider 1. financial leverage - amount of debt that the firm must first pay back before there is any money left over for the shareholders (debt vs. equity analysis) 2. o…
    brian edited 7 mos ago
  • pagefinancial statement analysis
    determining leverage Disaggregate ROA: Into product of other ratios. Remember, that ROA = return / assets = (Net Income + Interest Expense net taxes) / Average total assets Disag…
    brian edited 8 mos ago
  • pageDu Pont analysis
    financial leverage (measured by equity multiplier) ROE = (Net profit / Sales) * (Sales / Assets) * (Assets / Equity) = (Profit margin) * (Asset turnover) * (Equity multiplier) The Du Pont …
    brian edited 8 mos ago
  • pageforeign currency trading
    market. High Leverage Leverage is the key to understanding the risk associated with trading the Forex Market, and of course, the potential for gain. Many Forex brokers offer leverage as high as 200 – 1, meaning…
    Brian D Butler edited 1 mo ago
  • pagedeleverage
    Banking , leverage , Possible recession in 2008, credit crisis of 2007, margin call , Private equity Deleveraging In early 2008, there was talk a…
    Brian D Butler edited 2 mos ago
  • pageHedge Fund
    May utilize leverage to buy bonds and sometimes fixed income derivatives in order to profit from principal appreciation and interest income. Expected Volatility:Low Macro: Aims to profit from changes in global ec…
    Brian D Butler edited 1 mo ago
  • pagebreakeven analysis
    operating leverage you are using. 4. To decide how much to charge for your service 5. As part of a sensitivity analysis to see how your profit margin is to changes in variable and fixed costs. 6.&nb…
    Unknown User edited 4 mos ago
  • pageincome statement
    operating leverage, and contribution margin. Variable Income statement Revenues -All Variable costs: VMCGS (variable manufacturing COGS) *does not include FFO VS&A (v…
    Unknown User edited 4 mos ago
  • pageprivate equity trends
    decline in high-leverage megadeals has generated strong interest in middle-market transactions -- a trend that is expected to continue at least throughout 2008. Middle-market transactions are projected to remain i…
    Brian D Butler edited 1 day ago
  • pagecontribution margin
    operating leverage (contribution margin / net income). the higher the operating leverage, the more risk of the project (or firm). This is because if you take on additional debt (fixed interest costs), then t…
    Unknown User edited 4 mos ago
  • pagecost accounting
    operating leverage (contribution margin / net income). the higher the operating leverage, the more risk of the project (or firm). This is because if you take on additional debt (fixed interest costs), then t…
    brian edited 7 mos ago
  • pageconflicts of interest between shareholders and managers of corporations
    contribu financial leverage [edit] There are two important types of leverage to consider 1. financial leverage stock market [edit] page director: Brian D.Butler contributors: if you are interested in contribu dividend […
    Brian D Butler edited 1 mo ago
  • pageoperating margin
    w operating leverage [edit] There are two important types of leverage to consider 1. financial leverage cost accounting [edit] Cost accounting Provides the details necessary for a manage breakeven analysis [edit] Breake…
    Brian D Butler edited 1 mo ago
  • pageP-E ratio
    due to high leverage; Prospects for companies of this type, the "market sector". By dividing the price of one share in a company by the profits earned by the company per share, you arrive at the P/E ratio. If earnings m…
    Brian D Butler edited 1 wk ago
  • pageLong Term Capital Management
    already high leverage. Goldman Sachs, AIG and Berkshire Hathaway offered then to buy out the fund's partners for $250 million, to inject $4 billion and to operate LTCM within Goldman Sachs's own trading. The offer was r…
    brian edited 8 mos ago
  • pagemid-market private equity
    decline in high-leverage megadeals has generated strong interest in middle-market transactions -- a trend that is expected to continue at least throughout 2008. Middle-market transactions are projected to remain in focu…
    Brian D Butler edited 1 day ago
  • pagebeta coefficient
    problem is that leverage affects beta. Adding debt to a firm will increase its equity beta even if teh riskiness of the firms assets remains unchanged. As debt increases, the cash flows to remaining shockholders becomes…
    Brian D Butler edited 1 wk ago
  • pagemezzanine debt
    greater overall leverage levels than issuers in the High Yield market and as such involve additional risk. In compensation for the increased risk, mezzanine debt holders will require a higher returns for their investmen…
    Brian D Butler edited 1 mo ago
  • pagemargin call
    FRB Initial Margin Leverage Maintenance Margin Margin Margin Account Market Value Remargining There are two restrictions imposed on the amount you can borrow. First, the initial margin, which is the init…
    brian edited 3 mos ago
  • pagecapital structure
    "financial leverage". This means that the returns to shareholders will be magnified, but also that the firm is more risky to shareholders of equity. This added risk is due to the fact that firms with added d…
    Brian D Butler edited 2 mos ago
  • pagebuyout
    examines leveraged buyouts it rated between 2002 and 2007, and howequity sponsors differed in their post-close financial management. Here’s the key paragraph, in regard to dividend recap frequency La…
    brian edited 7 mos ago
  • pageLBO
    LBO Leveraged buyout is a form of Mergers and Acquisitions Fear of a takeover of the firm if the share price drops too low should help to eliminate the potential conflicts of interest between shareholde…
    brian edited 7 mos ago

 

Comments (0)

You don't have permission to comment on this page.