Term
| Why is higher debt more risky |
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Definition
-Higher breakeven point
-steeper slope of capital structure line
this can be a good thing in good times, and a bad thing in bad times
-Lower times interest ratio
lower the more risky |
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Term
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Definition
| it does not look at financial risk, so if the company is very leverage than it will add a risk pre to the EPS |
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Term
| Finanical breakeven point |
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Definition
| no forumla just the interest |
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Term
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Definition
EBIT / interest
-higher the better
-lower the more risky |
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Term
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Definition
| if they moved more capital sourcing to debt they would lower the cost of capital |
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Term
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Definition
most good times better and bad times worse
most leverage companies fall the first |
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Term
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Definition
operating leverage
-is the fixed cost of operating
-you have to sale to a certain level
financial leverage
-the interest on debt
-dividends on preffered stock
- lease payments
-total amount of fixed cost of capital |
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Term
| operating breakeven point |
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Definition
-Q = fixed cost / (price - variable cost)
-dollar amount = the fixed cost |
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Term
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Definition
| substitute fixed cost for variable cost |
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Term
| degree of financial leverage |
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Definition
| DFL = EBIT / (EBIT - interest) |
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Term
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Definition
Pros
-tax break
lower cost of capital
-fixed cost
-leverage
-no dulition
-low interest at this time
cons
-leverage/ high risk
-maturity of debt
-have to pay interest/ higher financial leverage
-negative effects on cash flow
-convents |
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Term
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Definition
pros
-more direct way to finance
- no maturity payment
-lower the cost of debt in the future
-lower risk
cons
-dividends are expected to grow
-dilution of ownership
-larger selling cost
- lower EPS |
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Term
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Definition
picking order theory
-make a list of preferred finanice sources then move down the list as each one is maxied out
-internal financing
static tradeoff theory
- you substitue debt for equity until firm value is maxed
-think about each opition and find the best one at the momment
-balance the benefits of debt with the cost of debt |
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Term
| relationship of debt and eps |
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Definition
the higher the debt the wider the range of eps can go
for example if EBIT is low or high
-the higher you leverage the higher the spread between the two |
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Term
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Definition
| depending on EBIT will depend on the debt ratio |
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Term
| Degree of operating leverage, DOL |
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Definition
| DOL = TR - TVC / TR - TVC - FC |
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Term
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Definition
degree of total leverage
delta EPS / delta sales |
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Term
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Definition
| current assets and sometimes current liabilities |
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Term
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Definition
financing opportunity hold up
cost of storing
low inventory higher risk of losing sales |
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Term
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Definition
current assets - current liabilities
when assets are higher it is positive and when liabiltities is higher it is negative
negative
-higher the risk
-more the profit |
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Term
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Definition
Cash conversion cycle
average days in
Inventory + ar - ap = ccc
-lower the better
-measured in days
-can be negative
-DWC is another name |
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Term
| Aggressive net working capital, assets pros and cons |
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Definition
Pros
few assets: lower financing cost
fewer bad debts on ar
- less days in ar
less old inventory
higher speed, reduce cost and higher new customers
cons
lost sales due to a push to lower AP
productions problems (low inventory)
liquidity issues (low cash)
could have issues with cash flow |
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Term
| Aggressive net working capital, assets pros and cons |
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Definition
pros
short term financing lower cost
speed and flexibility
-get funds quickly
-less convents
not paying for unneeded financing
Cons
avability of funds / roll over risk
-may become tighter on credit and not be able to loan
variable and unpredicted interest rates
repayment difficulties
high cost if late |
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Term
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Definition
increase sales, cheaper
decrease in ar, ppl use cash
less of bad debts, less ar
overhead is lower, bad debts are lower |
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