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Flashcards in Chapter 5 Deck (5)
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Financial leverage

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


Operating leverage

combination of fixed, variable and semivariable costs


break even

total costs = total revenue


too much financial leverage bad:

1. lenders will perceive greater risk and increase risk
2. common stockholders may drive down the price of the stock


financial leverage recommend for firms that are: (3)

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