Topic: Accounting

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Type of paper:	Essay
Subject area:	Accounting
Academic level:	College
Style:	APA
Size:	21.5 kB
Word count:	304 words/2 pages
Mark awarded:
Author:	Jenifer Weber
Date submitted:	2008-11-22 01:39:20
Rating/Votes count:	4.00 / 4

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change, economic, management, accounting, modern, leverage, Airbus, Free Encyclopedia, Encyclopedia Britannica, Financial Leverage, Combined Leverage, Power Prepares, Power Plan, American Finance Association, Eisenbeis Robert

Leverage is a measure of using given resources in such a way that the
potential positive or negative outcome is magnified (``Leverage (finance ' 2008 . In a firm , this leverage is broken into operating and
financial leverage .
Operating leverage measures the degree upon which fixed costs is
used in a company 's production processes . A higher operating leverage
means that a company would be more sensitive to change in sales , since
it must pay its fixed costs whatever the amount of revenue it has .
Consequently , it would benefit from a lower debt ratio because of this
higher business risk . The degree of operating leverage is measured as a
the quotient of the percentage change in EBIT and the percentage change
in sales .
Financial leverage refers to a company 's use of fixed charge
securities like debt and preferred stock to increase the return on
common stockholders . The degree of financial leverage is measured as the
change in EBIT over the change in earnings after interest . With the
optimum mix of debt and equity a company can maximize its EPS , but
higher debt carries higher risk . Risk is passed on to common
stockholders , but a firm that borrows will improve its return on equity .
Both are measures of change in one variable on another variable (``Leverage (finance ' 2008 . Their difference lies in the fixed
expenses that are behind them - in operating leverage it is the fixed
costs of production like depreciation , while financial leverage depends
on finance costs like interest expense . However , both are interrelated
in management decisions . A reduction in operating leverage would
normally lead to an increase in the optimum amount of financial
leverage , with the inverse being true .
R E F E R E N C E
``Leverage (finance (2008 . Wikipedia : The Free Encyclopedia .
Retrieved April 29 ,
2008 from http /en .wikipedia .org /wiki /Leverage_ 28finance 29
PAGE
PAGE 2...

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