Task: Operating Leverage
Leverage, as a business term, refers to debt or to the borrowing of funds to finance the purchase of a company's assets. Business owners can use either debt or equity to finance or buy the company's assets. Using debt, or leverage, increases the company's risk of bankruptcy. It also increases the company's returns, specifically its return on equity. This is true because, if debt financing is used rather than equity financing equity is not diluted.
Investors in a business like the business to use debt financing but only up to a point. Beyond a certain point, investors get nervous about too much debt financing as it drives up the company's default risk (About.com)
Peavler, R. (n.d.) What is Leverage? About.com (n.d.). Retrieved from
https://bizfinance.about.com/od/pricingyourproduct/qt/what-is-leverage-and-business-financial-risk.htm
Questions for discussion:
Operating leverage and margin of safety are terms used in business, what do they mean? How is capacity and size relating to operating leverage? Can you identify other similar measurements that are useful from a managerial accounting perspective?
You do not need to discuss every question or comment mentioned above. Choose one or two relevant aspects for further investigation and share your knowledge with the class. Try to add information not previously discussed by others. Please, provide information (not merely opinions) backed up by details or examples. Your comments should be in your own words and Include references in APA format, if appropriate.