Leverage and capital structure

1. LEVERAGE
AND
CAPITAL STRUCTURE

2. Leverage
refers to the effects that fixed
costs have on the returns that
shareholders
earn


4. Capital Structure
the mix of long-term debt and
equity maintained by the firm


5. 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


6. Contribution Margin (CM)
CM = S - VC
Unit CM
Unit CM = p - v

7. 
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

8. 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.