Hello again rcruz!!
Thank you for giving me the opportunity to answer this question.
As you requested me I will post the questions and answers here:
1. What factors would cause a difference in the use of financial
leverage for a utility company and an automobile company?
"A utility is in a stable, predictable industry and therefore can
afford to use more financial leverage than an automobile company,
which is generally subject to the influences of the business cycle. An
automobile manufacturer may not be able to service a large amount of
debt when there is a downturn in the economy."
2. Explain how the break-even point and operating leverage are
affected by the choice of manufacturing facilities (labor intensive
versus capital intensive).
"A labor-intensive company will have low fixed costs and a
correspondingly low break-even point. However, the impact of operating
leverage on the firm is small and there will be little magnification
of profits as volume increases. A capital-intensive firm, on the other
hand, will have a higher break-even point and enjoy the positive
influences of operating leverage as volume increases."
3. What does risk taking have to do with the use of operating and
financial leverage?
"Both operating and financial leverage imply that the firm will employ
a heavy component of fixed cost resources. This is inherently risky
because the obligation to make payments remains regardless of the
condition of the company or the economy."
4. How does the interest rate on new debt influence the use of financial leverage?
"The higher the interest rate on new debt, the less attractive
financial leverage is to the firm."
All the above questions and answer can be found at the following page
(with 6 more questions on the same topics and also 22 problems related
with their solutions):
"John P. Phillips, CPA - Assistant Professor of Business - Financial
Management - Chapter 5" at the Northern Virginia Comunity College:
http://www.nvcc.edu/home/jophillips/Fin%20215%20Solutions/NewChap5.htm
The course text used by this professor is:
"Fundamentals of Corporate Finance", 4th Ed., Brealy, Richard A,
Stewart C. Myers, and Alan J. Marcus, McGraw-Hill/Irwin a business
unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas,
New York, NY, 10020, copyright 2004.
Some resources about this book are listed below:
"Fundamentals of Corporate Finance, 4ed. - Information Center: Table of Contents":
http://highered.mcgraw-hill.com/sites/0072557524/information_center_view0/table_of_contents.html
"Corporate Finance Online":Choose a chapter to access to the available resources.
http://highered.mcgraw-hill.com/sites/0072557524/student_view0/corporate_finance_online.html
For example if you choose chapter 9, the following page will be opened.
http://highered.mcgraw-hill.com/sites/0072557524/student_view0/chapter9/
Under "More Resources" click on 'PowerPoints' to get the following
page (then just download the PowerPoint file):
http://highered.mcgraw-hill.com/sites/0072557524/student_view0/chapter9/powerpoints.html
"Fundamentals of Corporate Finance 3ed. - McGraw-Hill Online Learning
Center - Student Center":
http://www.mhhe.com/business/finance/bmm3e/student_index.mhtml
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I hope that this helps you. Feel free to request for a clarification
if you need it.
Best regards.
livioflores-ga |
