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2. Using Boundless Presentations The Appendix The appendix is for you to use to add depth and breadth to your lectures. You can simply drag and drop slides from the appendix into the main presentation to make for a richer lecture experience. Free to edit, share, and copy Feel free to edit, share, and make as many copies of the Boundless presentations as you like. We encourage you to take these presentations and make them your own. Free to share, print, make copies and changes. Get yours at www.boundless.com Boundless Teaching Platform Boundless empowers educators to engage their students with affordable, customizable textbooks and intuitive teaching tools. The free Boundless Teaching Platform gives educators the ability to customize textbooks in more than 20 subjects that align to hundreds of popular titles. Get started by using high quality Boundless books, or make switching to our platform easier by building from Boundless content pre-organized to match the assigned textbook. This platform gives educators the tools they need to assign readings and assessments, monitor student activity, and lead their classes with pre-made teaching resources. Get started now at: If you have any questions or problems please email: educators@boundless.com http://boundless.com/teaching-platform

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4. Defining Financial Leverage Impacts of Financial Leverage Leverage Models Combining Operating Leverage and Financial Leverage Thinking About Financial Leverage Capital Structure > Thinking About Financial Leverage Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_section_106&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=di rect&utm_source=boundless

5. Common ways to attain leverage include borrowing money, buying fixed assets and using derivatives. Fixed obligations create leverage because they allow a company to finance operations using more capital than the company independently possesses. Leverage is often expressed as a ratio and is specifically defined by the amount of debt that a company uses relative to the company's assets. Proper use of financial leverage can result in increased return on equity up to a certain level of operating income. but it also exposes shareholders to higher risk. Defining Financial Leverage Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-structure-13/thinking-about-financial-leverage-106/defining-financial- leverage-451- 3859?campaign_content=book_192_section_106&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless Sample Leverage Ratios View on Boundless.com Capital Structure > Thinking About Financial Leverage

6. If value is added from financial leveraging than the associated risk will not have a negative effect. At an ideal level of financial leverage, a company's return on equity increases because the use of leverage increases stock volatility, increasing its level of risk which in turn increases returns. If earnings before interest and taxes are greater than the cost of financial leverage than the increased risk of leverage will be worthwhile. Impacts of Financial Leverage Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-structure-13/thinking-about-financial-leverage-106/impacts-of-financial- leverage-452- 3856?campaign_content=book_192_section_106&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless Return On Equity View on Boundless.com Capital Structure > Thinking About Financial Leverage

7. The Modigliani-Miller theorem states that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information - and in an efficient market - the value of a firm is unaffected by how that firm is financed. The theorem tells us that capital structure matters precisely because one or more of these assumptions is violated. It also tells us which factors to look at to determine optimal capital structure. The Degree of Financial Leverage (DFL) gives us the percentage change in earnings given a change in operating income. The higher the DFL, the riskier the business. Leverage Models Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-structure-13/thinking-about-financial-leverage-106/leverage-models- 453- 3857?campaign_content=book_192_section_106&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless Modigliani-Miller including Taxes View on Boundless.com Capital Structure > Thinking About Financial Leverage

8. Total leverage measures the sensitivity of earnings to changes in the level of a company's sales. If the percentage change in earnings and the percentage change in sales are both known, a company can simply divide the percentage change in earnings by the percentage change in sales to determine total leverage. Companies usually choose one form of leverage over the other when analyzing potential investments. A company utilizing both forms of leverage undertakes a very high level of risk. Combining Operating Leverage and Financial Leverage Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-structure-13/thinking-about-financial-leverage-106/combining- operating-leverage-and-financial-leverage-454- 3858?campaign_content=book_192_section_106&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless Total Leverage Equation 1 View on Boundless.com Capital Structure > Thinking About Financial Leverage

9. Free to share, print, make copies and changes. Get yours at www.boundless.com Appendix

10. Key terms asymmetric information State of being regarding decisions on transactions where one party has more or better information than the other. derivative A financial instrument whose value depends on the valuation of an underlying asset; such as a warrant, an option, etc. Earnings Per Share The amount of earnings per each outstanding share of a company's stock. financial leverage any technique to multiply gains and losses, such as by borrowing liquidity Availability of cash over short term: ability to service short-term debt. solvency The state of having enough funds or liquid assets to pay all of one's debts; the state of being solvent. Free to share, print, make copies and changes. Get yours at www.boundless.com Capital Structure

11. Modigliani-Miller including Taxes The value of a levered firm equals the value of an unlevered firm plus the tax rate times the value of debt. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Modigliani–Miller theorem." GNU FDL http://en.wikipedia.org/wiki/Modigliani%25E2%2580%2593Miller_theorem View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Modigliani%25E2%2580%2593Miller_theoremView on Boundless.com Capital Structure

12. Total Leverage Equation 3 TL = Total Leverage. P = Unit Revenue. V = Unit Variable Cost. X = Units Sold. FC = Fixed Costs. I = Interest Expense. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Financial leverage." GNU FDL http://en.wikipedia.org/wiki/Financial_leverage#cite_note-13 View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Financial_leverage#cite_note-13View on Boundless.com Capital Structure

13. Financial Leverage Financial leverage is defined as the ratio of operating income to net income. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Financial leverage." GNU FDL http://en.wikipedia.org/wiki/Financial_leverage View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Financial_leverageView on Boundless.com Capital Structure

14. Total Leverage Equation 1 Total leverage = DOL x DOF Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Financial leverage." GNU FDL http://en.wikipedia.org/wiki/Financial_leverage#cite_note-13 View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Financial_leverage#cite_note-13View on Boundless.com Capital Structure

15. Sample Leverage Ratios This graph shows leverage ratios for major investment banks. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. "Leverage Ratios." CC BY-SA http://commons.wikimedia.org/wiki/File%253ALeverage_Ratios.png View on Boundless.comCC BY-SAhttp://commons.wikimedia.org/wiki/File%253ALeverage_Ratios.pngView on Boundless.com Capital Structure

16. Return On Equity The equation used to calculate return on equity. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Return on Equity." GNU FDL http://en.wikipedia.org/wiki/Return_on_Equity View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Return_on_EquityView on Boundless.com Capital Structure

17. Degree of Financial Leverage DFL is equal to EBIT divided by EBIT minus interest expense (I), minus preferred dividends (P) divided by 1 minus the tax rate (T). Free to share, print, make copies and changes. Get yours at www.boundless.com OER Commons. "n/a." CC BY http://www.oercommons.org/courses/management-of-capital/view View on Boundless.comCC BYhttp://www.oercommons.org/courses/management-of-capital/viewView on Boundless.com Capital Structure

18. Total Leverage Equation 2 Total leverage = DOL x DOF Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Financial leverage." GNU FDL http://en.wikipedia.org/wiki/Financial_leverage#cite_note-13 View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Financial_leverage#cite_note-13View on Boundless.com Capital Structure

19. Free to share, print, make copies and changes. Get yours at www.boundless.com Capital Structure Which of the following is a common way for a business to obtain leverage? A) Borrow money from a financial institution. B) Purchase fixed assets, such as machinery or land. C) Sell commercial paper that it issues on the open market. D) All of these answers.

20. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Capital Structure Which of the following is a common way for a business to obtain leverage? A) Borrow money from a financial institution. B) Purchase fixed assets, such as machinery or land. C) Sell commercial paper that it issues on the open market. D) All of these answers.

21. Free to share, print, make copies and changes. Get yours at www.boundless.com Capital Structure Which of the following regarding the possible financial impacts of leverage of a company is correct? A) At an ideal level of financial leverage, a company's return on equity decreases. B) Leverage increases risk, which decreases a stock's value. C) All of these answers. D) Involuntary leverage is typically caused by eroding equity value, not additional debt.

22. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Capital Structure Which of the following regarding the possible financial impacts of leverage of a company is correct? A) At an ideal level of financial leverage, a company's return on equity decreases. B) Leverage increases risk, which decreases a stock's value. C) All of these answers. D) Involuntary leverage is typically caused by eroding equity value, not additional debt.

23. Free to share, print, make copies and changes. Get yours at www.boundless.com Capital Structure A company has an EBIT of $2.5 million, with an interest expense of $800,000 and preferred dividends of $700,000. Its tax rate is 35%. What is this company's degree of financial leverage? A) 4.39 B) 1.47 C) 1.75 D) 4.01

24. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Capital Structure A company has an EBIT of $2.5 million, with an interest expense of $800,000 and preferred dividends of $700,000. Its tax rate is 35%. What is this company's degree of financial leverage? A) 4.39 B) 1.47 C) 1.75 D) 4.01

25. Free to share, print, make copies and changes. Get yours at www.boundless.com Capital Structure A company sells 150,000 units at $60 a unit with a variable cost of $30 a unit. It has $1 million in fixed costs and $600,000 in interest costs. What is the company's total leverage? A) 1.28 B) 1.21 C) 1.55 D) 1.15

26. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Capital Structure A company sells 150,000 units at $60 a unit with a variable cost of $30 a unit. It has $1 million in fixed costs and $600,000 in interest costs. What is the company's total leverage? A) 1.28 B) 1.21 C) 1.55 D) 1.15

27. Attribution Wikipedia. "Financial leverage." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Financial_leverageCC BY-SA 3.0http://en.wikipedia.org/wiki/Financial_leverage Wikipedia. "Return on Equity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Return_on_EquityCC BY-SA 3.0http://en.wikipedia.org/wiki/Return_on_Equity Wiktionary. "liquidity." CC BY-SA 3.0 http://en.wiktionary.org/wiki/liquidityCC BY-SA 3.0http://en.wiktionary.org/wiki/liquidity Wiktionary. "solvency." CC BY-SA 3.0 http://en.wiktionary.org/wiki/solvencyCC BY-SA 3.0http://en.wiktionary.org/wiki/solvency Wikipedia. "asymmetric information." CC BY-SA 3.0 http://en.wikipedia.org/wiki/asymmetric%252520informationCC BY-SA 3.0http://en.wikipedia.org/wiki/asymmetric%252520information Wikipedia. CC BY-SA 3.0 http://en.wikipedia.org/w/index.php?title=Modigliani%252525E2%25252580%25252593Miller_theorem&printable=yesCC BY-SA 3.0 http://en.wikipedia.org/w/index.php?title=Modigliani%252525E2%25252580%25252593Miller_theorem&printable=yes Wikipedia. "Financial leverage." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Financial_leverageCC BY-SA 3.0http://en.wikipedia.org/wiki/Financial_leverage OER Commons. CC BY-SA http://www.oercommons.org/courses/management-of-capital/viewCC BY-SAhttp://www.oercommons.org/courses/management-of-capital/view Wikipedia. "Financial leverage." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Financial_leverageCC BY-SA 3.0http://en.wikipedia.org/wiki/Financial_leverage Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/earnings-per-shareCC BY-SA 3.0http://www.boundless.com//finance/definition/earnings-per-share Wikipedia. "Financial leverage." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Financial_leverageCC BY-SA 3.0http://en.wikipedia.org/wiki/Financial_leverage Autoi. CC BY-SA http://www.autoi.org/24/t-605224.htmlCC BY-SAhttp://www.autoi.org/24/t-605224.html Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//business/definition/financial-leverageCC BY-SA 3.0http://www.boundless.com//business/definition/financial-leverage Wikipedia. "derivative." CC BY-SA 3.0 http://en.wikipedia.org/wiki/derivativeCC BY-SA 3.0http://en.wikipedia.org/wiki/derivative OER Commons. CC BY-SA http://www.oercommons.org/courses/management-of-capital/viewCC BY-SAhttp://www.oercommons.org/courses/management-of-capital/view Free to share, print, make copies and changes. Get yours at www.boundless.com Capital Structure