Purchase Solution

# Excessive, Operating and Financial Leverage

Not what you're looking for?

Q1. What does it mean when it is said that a company is excessively leveraged? What could be the effects of excessive leverage?

Q 2. Differentiate operating leverage, financial leverage, and the total leverage of the firm. Do these types of leverage complement one another? Why or why not?

Q3. (Weighted average cost of capital) In the spring of last year Tempe Steel learned that the firm would need to re-evaluate the company's weighted average cost of capital following a significant issue of debt. The firm now has financed 42% of its assets using debt and 58% using equity. Calculate the firm's weighted average cost of capital where the firm's borrowing rate on debt is 8.3%, it faces a 35% tax rate, and the common stockholders require a 20.6% rate of return.

Tempe Steels WACC is___% (Round to three decimal places.)

##### Solution Summary

Excessive, operating and financial leverages are examined. The expert differentiates operating leverages.

##### Solution Preview

Q1. What does it mean when it is said that a company is excessively leveraged? What could be the effects of excessive leverage?

Leverage is the measure of debt that is taken on by a firm as capital. Excessively leverage means that a firm has taken on large amounts of debt that have not been adequately covered by the funds generated by the debt. When making borrowings it is best to ascertain whether the inflows, financed by the debt, is above the cost associated with the debt.

A firm that is excessively leveraged would be constantly experiencing cash flow ...

Solution provided by:
###### Education
• B. Sc., University of Nigeria
• M. Sc., London South Bank University
###### Recent Feedback
• "Thank you."
• "thank you Chidi Ngene.. if you have any APA references would be great"
• "Thank you so much for your help, your explanations were easy to understand and apply!"
• "are you able to highlight the equations used either on the xlsx or a word doc as to how each graph was formed- overall looks fine i just need help understanding this myself"
• "Chidi Ngene, M. Sc. Was extremely helpful as without the help and guidance I would have failed, but with the help I passed. I still have a lot to learn and in need of the guidance to understand and learn more on the subject. I would recommend Chidi Ngene and BrainMass to anyone that are in need of help. Thank you!!"

##### Marketing Management Philosophies Quiz

A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.