Chapter 5 Flashcards

1
Q

Financial leverage

A

the use of borrowed money to increase production volume and thus sales and earnings
- ratio of total debt : total assets

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2
Q

Operating leverage

A

combination of fixed, variable and semivariable costs

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3
Q

break even

A

total costs = total revenue

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4
Q

too much financial leverage bad:

A
  1. lenders will perceive greater risk and increase risk

2. common stockholders may drive down the price of the stock

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5
Q

financial leverage recommend for firms that are: (3)

A
  1. stable industry
  2. positive stage of growth
  3. favourable economic conditions
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