Discuss the relationships between operating, financial and combined leverage? Does the firm use financial leverage if preferred stock is present in its capital structure? What type of effect occurs when the firm uses operating leverage?
We learned that Apple Computer (AAPL) recently reinstated the payment of cash dividends, which had been suspended since the 1990s. What are some reasons that might have influenced the firm's decision to begin paying dividends again?
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First, operating leverage is the ratio between the fixed costs of the total production costs to the variable component of the total production costs. The higher this value is the higher is the company's operating leverage. Financial leverage is total debt divided by the company's stockholders' equity. Combined leverage is the percentage change in earnings per share of a company divided by its operating leverage.
Capital structure and dividend policy relationship is discussed.