Operating Leverage:

1. What is operating leverage and how does it affect a firms business risk?
2. More operating leverage leads to more business risk, for then a small sales decline causes a big profit decline. Explain.
3. What are the implications if a companys operating leverage is high?

Financial Leverage:

1. What is financial leverage and how does it affect a firms business risk?
2. What is the effect of leverage on profitability and debt coverage?
3. What are the implications if a companys financial leverage is high?
4. All things equal, compare a leveraged firm versus an unleveraged firm.
5. Return on invested capital (ROIC) is unaffected by financial leverage. Explain.

Optimal Capital Structure

1. What are the factors to be considered in determining a firms capital structure?
2. What is recapitalization?
3. Enumerate and explain the components or variables of the Hamada equation.
4. What are the ways in determining the firms optimal structure.
5. How would these factors affect the target capital structure?

• Sales stability, High operating leverage, Increase in the corporate tax rate, Increase in the personal tax rate, Increase in bankruptcy costs, Management spending lots of money on lavish perks, Financial flexibility, Firms growth rate

1. What is the major weakness of Modigliani-Miller Irrelevance Theory?
2. What are signaling effects in capital structure?