Operating and Financial Power Essay

Chapter 5

Operating and Financial Leverage

Dialogue Questions

|5-1. |Discuss the many uses for break-even analysis. | | | | | |Such analysis allows the firm to determine at what level of businesses it will make your money back (earn absolutely no profit) | | |and to explore the relationship between amount, costs, and profits. | | | | |5-2. |What elements would create a difference in the use of economic leverage for the utility firm and a motor vehicle | | |company? | | | | | |A utility is in a reliable, predictable market and therefore can afford to use more financial leveraging than an | | |automobile company, which is generally subject to the influences in the business cycle. An automobile | | |manufacturer may not be able to service a great deal of debt once there is a recession in the economy. | | | | |5-3. |Explain how the break-even point and working leverage are influenced by the choice of production facilities | | |(labor intensive versus capital intensive). | | | | | |A labor-intensive organization will have low fixed costs and a correspondingly low break-even point. However , the | | |impact of operating leveraging on the firm is small , and there will be very little magnification of profits since volume | | |increases. A capital-intensive firm, alternatively, will have a higher break-even level and enjoy the | | |positive impact on of working leverage since volume boosts. | | | | |5-4. |What role will depreciation enjoy in break-even analysis depending on accounting moves? Based on funds flows? Which | | |perspective is longer term in nature? | | | | | |For break-even analysis depending on accounting goes, depreciation is recognized as part of fixed costs. Pertaining to cash | | |flow purposes, it truly is eliminated from fixed costs. | | | | | |The accounting flows perspective can be longer-term in nature since we must consider the problems of equipment | | |replacement. | | |

|5-5. |What really does...



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