CHAPTER 14
Financial and Operating Leverage
LEARNING OBJECTIVES
- Explain the concept of financial leverage.
- Discuss the alternative measures of financial leverage.
- Calculate EPS and perform EBIT-EPS analysis.
- Determine EBIT break-even point and draw EBIT-EPS chart.
- Describe the risk and return implications of financial leverage.
- Analyse the effects of financial and operating leverage.
- Illustrate the difference between operating risk and financial risk.
INTRODUCTION
Given the capital budgeting decision of a firm, it has to decide the way in which the capital projects will be financed. Every time the firm makes an investment decision, it is at the same time making a financing decision also. For example, a decision to build a new plant or ...
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