Assessing a problem about leveraging
Not what you're looking for?
Leverages
Mr. Jim Smith is considering the possibility of opening his own machine shop .He expects first year sales to be AED. 600,000 , and he feels that his variable costs will be approximately 50% of sales . His fixed costs in the first year will be
AED. 250,000.
Jim will need to raise AED 800,000 to start the business and is considering two ways of financing :
1) 60% equity financing and 40% debt at an interest rate of 14% or
2) 100% equity
Required :
1) Calculate the degree of financial leverage under each financing plan. Include an explanation of what this figure means.
2) Calculate the degree of combined leverage under each financing plan.
Purchase this Solution
Solution Summary
This posting helps with a problem about leverages. This solution helps consider two ways of financing and calculate the degree of financial leverage under a financing plan.
Solution Preview
EXPLANATION
financial leverage denotes the degree to which the business is using the debt. If the business is highly levered, then there is a risk of becoming
bankrupt if ...
Purchase this Solution
Free BrainMass Quizzes
Social Media: Pinterest
This quiz introduces basic concepts of Pinterest social media
Business Processes
This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.
Understanding Management
This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.
Introduction to Finance
This quiz test introductory finance topics.
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.