Chapter+14capstructure5-30财务管理.pptVIP

CHAPTER 14Capital Structure and Leverage Business vs. financial risk Operating leverage Optimal Capital structure Uncertainty about future operating income (EBIT), i.e., how well can we predict operating income? Note that business risk does not include financing effects. What is business risk? Probability EBIT E(EBIT) 0 Low risk High risk Operating Leverage The extent to which fixed costs are used in a firm’s operations Example: Price = $5 Plan A’s variable cost = $2.5 and fixed cost = $2,000 Plan B’s variable cost = $3.5 and fixed cost = $600 EBIT = P∙Q - V∙Q – F Breakeven quantity of A = 5Q - 2.5Q - 2000 = 0 = Q = 800 B = 5Q – 3.5Q – 600 = 0 = Q = 400 Operating Leverage Plan A and Plan B will have the same EBIT if 5Q – 2.5Q -2000 = 5Q – 3.5Q -600 = Q = 1400 0 ~ 399 Both incur loss. 401 ~ 799 Only B is profitable. 801 ~ 1399 Both are profitable but B is better. 1400 Both have the same profit. 1401 ~ A is better. Effect of operating leverage More operating leverage leads to more business risk, for then a small sales decline causes a big profit decline. Using operating leverage Typical situation: Can use operating leverage to get higher E(EBIT), but risk also increases. Probability EBITL Low operating leverage High operating leverage EBITH What is financial leverage?Financial risk? Financial leverage is the use of debt. Financial risk is the additional risk concentrated on common stockholders as a result of financial leverage. An example:Illustrating effects of financial leverage Two firms with the same operating leverage, business risk, and probability distribution of EBIT. Only differ with respect to their use of debt (capital structure). Firm U Firm L No debt $10,000 of 12% debt $20,000 in assets $20,000 in assets 40% tax rate 40% tax rate Firm U Firm L (Tax =40%) U Economy Bad Avg. Good Prob. 0.25 0.50 0.25 EBIT $2,000 $3,000 $4,000 Interest 0 0 0 E