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