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leverage and capital structure

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Leverage and capital structure

Published in: Economy & Finance, Business
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leverage and capital structure

  1. 1. LEVERAGE AND CAPITAL STRUCTURE
  2. 2. Leverage refers to the effects that fixed costs have on the returns that shareholders earn 
  3. 3. Capital Structure the mix of long-term debt and equity maintained by the firm 
  4. 4. S = Sales x = Sales volume in units p = Selling price per unit v = Unit variable cost VC = Variable operating costs FC = Fixed operating costs Break-even Analysis used to indicate the level of operations necessary to cover all costs and to evaluate the profitability associated with various levels of sales 
  5. 5. Contribution Margin (CM) CM = S - VC Unit CM Unit CM = p - v
  6. 6.  Example:  S= P37500  x= 1,500 units  p = P25  v = P10  VC = P15000  FC = P15000 Find the CM and the unit CM.  Solution: CM = S – VC CM = P37500 – P15000 CM = P22500 unit CM = p – v unit CM = P25 – P10 unit CM = P15
  7. 7. Break-even point = Fixed costs Unit CM Break-even point = FC p-v Example: Break-even point in units = P15000/P15 Break-even point in units = 1000 units Break-Even Point The level of sales necessary to cover all fixed and variable operating costs.

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