Section outline

  • Learning Objectives:

    Explain how operating leverage contributes to a firm’s business risk and conduct a break even analysis, complete with a break even chart.

    Lecture contents:

    1. Introduction to concept of leverage
    2. Operating leverage, its usefulness as a tool in decision making on scale of operations
    3. Financial leverage – advantage of debt in preference to equity, its usefulness to increase Earning Per Share (EPS) for shareholder
    4. Total leverage – combination of operating and financial leverages
    5. Attendant risks in increasing leverage, both operating and financial
    6. Numerical exercises in operating, financial and total leverages