財(cái)務(wù)管理ppt英文課件Chapter-16

1、Chapter 16Operating and Financial Leverage0Operating and Financial LeverageOperating LeverageFinancial LeverageTotal LeverageCash-Flow Ability to Service DebtOther Methods of AnalysisCombination of Methods1Copyright 2001 Prentice-Hall, Inc.The Du Pont IdentityBreaks ROE into three parts:operating ef

2、ficiencyasset use efficiencyfinancial leverage2Copyright 2001 Prentice-Hall, Inc.Operating LeverageOne potential “effect” caused by the presence of operating leverage is that a change in the volume of sales results in a “more than proportional” change in operating profit (or loss).Fixed CostSalesEBI

3、T3Copyright 2001 Prentice-Hall, Inc.Break-Even AnalysisBreak-Even Analysis - A technique for studying the relationship among fixed costs, variable costs, profits, and sales volume.When studying operating leverage, “profits” refers to operating profits before taxes (i.e., EBIT) and excludes debt inte

4、rest and dividend payments.4Copyright 2001 Prentice-Hall, Inc.Break-Even ChartQUANTITY PRODUCED AND SOLD0 1,000 2,000 3,000 4,000 5,000 6,000 7,000Total RevenuesProfitsFixed CostsVariable CostsLossesREVENUES AND COSTS($ thousands)175250100 50Total Costs5Copyright 2001 Prentice-Hall, Inc.Break-Even (

5、Quantity) PointBreak-Even Point - The sales volume required so that total revenues and total costs are equal; may be in units or in sales dollars.Breakeven occurs when EBIT = 0 Q (P - V) - FC= EBIT QBE (P - V) - FC = 0 QBE (P - V) = FC QBE = FC / (P - V) 6Copyright 2001 Prentice-Hall, Inc.Operating

6、LeverageThe degree of operating leverage (DOL) measures how sensitive a firm (or project) is to its fixed costs. Operating leverage increases as fixed costs rise and variable costs fall.The degree of operating leverage is given by:DOL = Percentage change in operating profit (EBIT)Percentage change i

7、n output (or sales)DDQQEBITEBIT=7Copyright 2001 Prentice-Hall, Inc.Degree of Operating Leverage (DOL)Degree of Operating Leverage - The percentage change in a firms operating profit (EBIT) resulting from a 1 percent change in output (sales).DOL = EBITD SalesSalesD EBIT=Q(P-V)Q(P-V) - FCQQ - QBE=8Cop

8、yright 2001 Prentice-Hall, Inc.Operating LeverageVolume$Fixed costsTotal costs EBIT VolumeOperating leverage increases as fixed costs rise and variable costs fall.Fixed costsTotal costs9Copyright 2001 Prentice-Hall, Inc.Interpretation of the DOL2,000 4,000 6,000 8,00012345QUANTITY PRODUCED AND SOLD0

9、-1-2-3-4-5DEGREE OF OPERATINGLEVERAGE (DOL)QBE10Copyright 2001 Prentice-Hall, Inc.Interpretation of the DOLDOL is a quantitative measure of the “sensitivity” of a firms operating profit to a change in the firms sales.The closer that a firm operates to its break-even point, the higher is the absolute

10、 value of its DOL.When comparing firms, the firm with the highest DOL is the firm that will be most “sensitive” to a change in sales.11Copyright 2001 Prentice-Hall, Inc.DOL and Business RiskBusiness Risk - The inherent uncertainty in the physical operations of the firm. Its impact is shown in the va

11、riability of the firms operating income (EBIT).DOL is only one component of business risk and becomes “active” only in the presence of sales and production cost variability.DOL magnifies the variability of operating profits and, hence, business risk.12Copyright 2001 Prentice-Hall, Inc.Financial Leve

12、rageFinancial Leverage - The use of fixed financing costs by the firm. The British expression is gearing.Financial leverage is acquired by choice.Used as a means of increasing the return to common shareholders.Fixed expensesEBITEPS13Copyright 2001 Prentice-Hall, Inc.EBIT-EPS Break-Even, or Indiffere

13、nce, AnalysisEBIT-EPS Break-Even Analysis - Analysis of the effect of financing alternatives on earnings per share. The break-even point is the EBIT level where EPS is the same for two (or more) alternatives.Calculate EPS for a given level of EBIT at a given financing structure.(EBIT - I) (1 - t) -

14、Pref. Div.# of Common SharesEPS=14Copyright 2001 Prentice-Hall, Inc.Financial Leverage, EPS, and ROE CurrentAssets$20,000Debt$0Equity$20,000Debt/Equity ratio0.00Interest raten/aShares outstanding400Share price$50Proposed$20,000$8,000$12,0002/38%240$50Consider an all-equity firm that is considering g

15、oing into debt. (Maybe some of the original shareholders want to cash out.)15Copyright 2001 Prentice-Hall, Inc.EPS and ROE Under Both Capital StructuresLeveredRecessionExpectedExpansionEBIT$1,000$2,000$3,000Interest640640640Net income$360$1,360$2,360EPS$1.50$5.67$9.83ROA5%10%15%ROE3%11%20%Proposed S

16、hares Outstanding = 240 sharesAll-EquityRecessionExpectedExpansionEBIT$1,000$2,000$3,000Interest000Net income$1,000$2,000$3,000EPS$2.50$5.00$7.50ROA5%10%15%ROE5%10%15%Current Shares Outstanding = 400 shares16Copyright 2001 Prentice-Hall, Inc.Financial Leverage and EPS(2.00)0.002.004.006.008.0010.001

17、2.001,0002,0003,000EPSDebtNo DebtBreak-even point EBIT in dollars, no taxesAdvantage to debtDisadvantage to debt17Copyright 2001 Prentice-Hall, Inc.Degree of Financial Leverage (DFL)Degree of Financial Leverage (DFL)- The percentage change in a firms earnings per share (EPS) resulting from a 1 perce

18、nt change in operating profit.DFL = Percentage change in earnings per share (EPS)Percentage change in operating profit (EBIT)DDEBITEBITEPSEPS=18Copyright 2001 Prentice-Hall, Inc.Computing the DFLEBIT = Earnings before interest and taxesI = InterestPD = Preferred dividendst = Corporate tax rate=EBITE

19、BIT - I - PD / (1 - t) DFL19Copyright 2001 Prentice-Hall, Inc.Financial RiskFinancial Risk - The added variability in earnings per share (EPS) - plus the risk of possible insolvency - that is induced by the use of financial leverage.Debt increases the probability of cash insolvency over an all-equit

20、y-financed firm. We must have EBIT at least to cover the interest payment.Debt also increased the variability in EPS as the DFL increased from 1.00 to 1.25.20Copyright 2001 Prentice-Hall, Inc.Financial Leverage Considerations:If profits are down, dividends (the key cost of equity financing) can ofte

21、n be deferred.Interest (cost of debt) must always be paid for a firm to remain solvent Financial distress costs: costs incurred with going bankrupt or costs that must be paid to avoid bankruptcyAccording to the static theory of capital structure, gains from the tax shield are offset by the greater p

22、otential of financial distress costs.21Copyright 2001 Prentice-Hall, Inc.Total Firm RiskTotal Firm Risk - The variability in earnings per share (EPS). It is the sum of business plus financial risk.Total firm risk = business risk + financial riskCVEPS is a measure of relative total firm riskCVEBIT is

23、 a measure of relative business riskThe difference, CVEPS - CVEBIT, is a measure of relative financial risk22Copyright 2001 Prentice-Hall, Inc.Coefficient of Variation is the ratio of the standard deviation of a distribution to the mean of that distribution.Coefficient of VariationCV = / RC.V. is a

24、measure of risk per dollar of expected return. It is a measure of RELATIVE risk.23Copyright 2001 Prentice-Hall, Inc.Degree of Total Leverage (DTL)Degree of Total Leverage - The percentage change in a firms earnings per share (EPS) resulting from a 1 percent change in output (sales).FEFCSalesEBITEPS2

25、4Copyright 2001 Prentice-Hall, Inc.Degree of Total Leverage (DTL)DTL = Percentage change in earnings per share (EPS)Percentage change in output (or sales)DDQQEPSEPS= = =DDEBITEBITEPSEPSDDQQEBITEBITDFL DOLQ (P - V)Q (P - V) - FC - I - PD / (1 - t) =25Copyright 2001 Prentice-Hall, Inc.Risk versus Retu

26、rnCompare the expected EPS to the DTL for the common stock equity financing approach to the debt financing approach. Financing E(EPS)DTL Equity $3.501.20 Debt $5.601.50Greater expected return (higher EPS) comes at the expense of greater potential risk (higher DTL)!26Copyright 2001 Prentice-Hall, Inc

27、.What is an Appropriate Amount of Financial Leverage?Debt Capacity - The maximum amount of debt (and other fixed-charge financing) that a firm can adequately service.Firms must first analyze their expected future cash flows.The greater and more stable the expected future cash flows, the greater the

28、debt capacity.Fixed charges include: debt principal and interest payments, lease payments, and preferred stock dividends.27Copyright 2001 Prentice-Hall, Inc.Indicates a firms ability to cover interest charges.A ratio value equal to 1 indicates that earnings are just sufficient to cover interest char

29、ges.Coverage Ratios Interest charges EBIT ratiocoverage Interest =28Copyright 2001 Prentice-Hall, Inc.Indicates a firms ability to cover interest charges and principal payments.Allows us to examine the ability of the firm to meet all of its debt payments. Failure to make principal payments is also d

30、efault.Coverage Ratios Interest charges EBIT ratiocoverage Debt-service =+ Principal payments / (1-t) 29Copyright 2001 Prentice-Hall, Inc.The debt-service coverage ratio accounts for required annual principal payments.A single ratio value cannot be interpreted identically for all firms as some firms have greater debt capacity.Annual financial lease payments should be added to both the numerator and denominator of the debt-service coverage ratio as financial leases are similar to debt.Summary of the Coverage Ratio Discussion30Copyright 2001 Prentice-Hall, Inc.Other Methods of AnalysisCap