FINA 410 Study Guide - Midterm Guide: Operating Leverage

• School: Concordia University
• Department: Finance
• Course: FINA 410
• Professor: Louis Charbonneau

Document Summary

Nature of product or service offered by company: higher beta: high end product, not absolute necessity, lower beta: grocery, necessity. Operating leverage (structure: higher beta: high fix cost, lower beta: low fix cost. Financial leverage: higher beta: the more you borrow, lower beta: the less they borrow. Bottom-up betas: beta for your equity based on the business you are in and the leverage chosen. Find the business that your firm operates in look up regression beta for all publicly regression end up with average beta across 2 companies. Unlevering the beta: taking out the effect of debt = pure beta (business beta) How much debt equity you have as a business. The standard error in a bottom-up beta will be significantly lower than the standard error in a single regression beta. Standard error of bottom-up beta = (cid:3028)(cid:3049)(cid:3032)(cid:3045)(cid:3028)(cid:3034)(cid:3032) (cid:3046)(cid:3047)(cid:3028)(cid:3041)(cid:3031)(cid:3028)(cid:3045)(cid:3031) (cid:3032)(cid:3045)(cid:3045)(cid:3042)(cid:3045) (cid:3028)(cid:3030)(cid:3045)(cid:3042)(cid:3046)(cid:3046) (cid:3029)(cid:3032)(cid:3047)(cid:3028)(cid:3046)