Capital Structure chapter 14

Costs that change in direct proportion to changes in the level of sales or output. Examples include raw materials and direct labor.

The percentage change in a firm's EBIT resulting from a 1% change in sales or output. It measures a company's sensitivity to changes in sales.

Costs that remain constant regardless of changes in the level of sales or output. Examples include rent, insurance, and salaries of top management.

A measure of the total variability of a firm's EPS associated with a change in sales. It is calculated as the product of DOL and DFL.

The percentage change in EPS resulting from a given percentage change in EBIT. It measures a company's sensitivity to changes in EBIT.

A technique that analyzes different financing plans by calculating the EBIT level at which EPS is the same for both plans.

The point where EPS for two alternative financing plans is equal. This helps determine at what EBIT level one plan is better than the other.

A situation where a firm is unable to meet its short-term obligations, even though it may have long-term solvency. This is a temporary condition.

This occurs when a firm has insufficient cash to cover its current obligations. It is a serious condition.

A technique that assesses the company's ability to generate enough cash to cover its short-term obligations in a downturn.

A term that describes a company that uses large amounts of fixed assets, such as equipment, in its operations. This leads to a high DOL.

A strategy where a company gives its subsidiaries the authority to make operational decisions independently. This encourages adaptability to local conditions.

A strategy where a company makes financing decisions at the headquarters level, often using a standardized approach across subsidiaries.

A common stock dividend, when declared by the board of directors of a company, is considered a fixed charge under the degree of financial leverage because it is expected by investors.

It is the cost of obtaining capital from debt financing. It is not included in fixed charges when calculating the degree of financial leverage.

The cost of obtaining capital from preferred stock financing, typically in the form of fixed dividend payments. It is considered a fixed charge under the degree of financial leverage.

These are the funds that companies keep for future use instead of distributing them to the owners. It is not typically considered a source of financing for fixed costs.

The company chooses to use debt financing (bonds or loans) instead of equity financing (selling common stock). While this can lead to a higher rate of return on equity, it also comes with greater risk due to the fixed interest payments that must be made.

A company’s use of fixed costs in its operations to generate a magnified return on sales. It is measured by DOL.

A company’s use of fixed financial charges, such as interest and preferred stock dividends, in its capital structure to magnify the return to common stockholders. It is measured by DFL.

A company’s use of fixed costs in its operations and fixed financial charges in its capital structure to magnify the return to common stockholders. It is measured by DCL, the product of DOL and DFL.

A major business initiative undertaken by a company that involves significant capital investment, potentially expanding operations, introducing new products or services, or entering new markets.

These costs represent the costs associated with using long-term assets in its operations. They are typically considered fixed costs.

The risk that a company may not be able to meet its financial obligations due to its debt burden. It's higher for companies with high DFL.

The risk that a company's operating income (EBIT) may fluctuate due to factors like changes in demand, competition, or input costs. It's higher for companies with high DOL.

It is the ratio of a company's total fixed costs to its total income. It is used to estimate the effects of a change in sales on the company’s income. The higher the ratio, the more dramatic the change in EBIT for a given change in sales.

A measure of the proportion of a company’s sales or output that are variable costs.

It is a type of cost that has fixed and variable components. These costs increase as production or sales increase, but the increase is not directly proportional.