Management and Organizational Studies 2310A/B Chapter Notes - Chapter 10: Operating Leverage, Fixed Cost, Income Statement

• School: Western University
• Department: Management and Organizational Studies
• Course: Management and Organizational Studies 2310A/B
• Professor: Doug Hazlewood

Document Summary

Use of fixed assets / debt financing in capital structure to maximize the return to owners which is measured return on equity (roe) or earnings per share (eps) Note: management has almost all control over the risk introduced through the use of leverage. Increasing leverage increases risk and expected return: decreasing leverage decreases risk and expected return. Three basic types of leverage: operating leverage concerned with the relationship between the firm"s sales revenue and its ebit, financinal leverage concerned with the relationships between the firm"s. Ebit and its eps or roe: total leverage concerned with the relationships between the firm"s sales revenue and eps and/or roe. Note: ebit earnings before interest and taxes a descriptive label for operating profits. First, we look at b/e analysis, which lays the foundation for the leverage concepts by demonstrating the effects of fixed costs on the firm"s operations.