4. Financial leverage

# Chapter 4FINANCIAL LEVERAGE

by josavere

INTRODUCTION

The best operative result and of better leverage in relation to the worse alternative (superior to reviewed balance point), constitutes the starting point to calculate the financial leverage; remember that the operative leverage does relate to the operation of the business (production and sales) and that is the measurement that a good expectation present encourages to look for the appropriate financing to maximize the final result, which is obtained in the measurement that the company generates value, with reflection in the value of market of the share.

1.  THE COST OF THE CAPITAL

Knowing the amount of deductible interests, we get to calculate the net profit of each alternative, and soon we divided by the number of shares of each of them.

To calculate the profit per common share, the best alternative is the one that allows obtaining the greater volume of profit per share. The difference between the maximum and the minimum profit per share will give the degree of calculated financial leverage according to the following formula:

MATRICES
MATRIX 1

 Quantity Capital Cost Percentage C.C. Weighed Shares 3000 at \$1000 4,000,000.00 0.329 0.16 5.27 Retained profit 2,000,000.00 0.298 0.08 2.39 Suppliers 7,000,000.00 0.601 0.28 16.83 Rendered to short t. 8,000,000.00 0.345 0.32 11.04 Rendered to long t. 1,000,000.00 0.268 0.04 1.07 Labor liabilities 2,000,000.00 0.127 0.08 1.01 Bonuses 1,000,000.00 0.268 0.04 1.07 25,000,000.00 1.00 38.68 Amount of shares 3,000.00 Interest 3,549,244.24

MATRIX 2

 Quantity Capital Cost Percentage C.C. Weighed Shares 4000 at \$1000 4,000,000.00 0.329 0.16 5.27 Retained profit 2,000,000.00 0.298 0.08 2.39 Suppliers 5,000,000.00 0.601 0.28 12.02 Rendered to short t. 5,000,000.00 0.345 0.20 6.90 Rendered to long t. 3,000,000.00 0.268 0.12 3.22 Labor liabilities 2,000,000.00 0.127 0.08 1.01 Bonuses 4,000,000.00 0.268 0.16 4.29 25,000,000.00 1.00 35.10 Amount of shares 4,000.00 Interest 3,855,786.74

MATRIX 3

 Quantity Capital Cost Percentage C.C. Weighed Shares 5000 at \$1000 5,000,000.00 0.329 0.20 6.58 Retained profit 2,000,000.00 0.298 0.08 2.39 Suppliers 2,000,000.00 0.601 0.08 4.81 Rendered to short t. 4,000,000.00 0.345 0.16 5.52 Rendered to long t. 6,000,000.00 0.268 0.24 6.44 Labor liabilities 2,000,000.00 0.127 0.08 1.01 Bonuses 4,000,000.00 0.268 0.16 4.29 25,000,000.00 1.00 31.04 Amount of shares 5,000.00 Interest 4,315,623.30

MATRIX 4

 Quantity Capital Cost Percentage C.C. Weighed Shares 5000 at \$1000 5,000,000.00 0.329 0.20 6.58 Retained profit 2,000,000.00 0.298 0.08 2.39 Suppliers - 0.601 - 0.00 Rendered to short t. 2,000,000.00 0.345 0.08 2.76 Rendered to long t. 9,000,000.00 0.268 0.36 9.66 Labor liabilities 2,000,000.00 0.127 0.08 1.01 Bonuses 5,000,000.00 0.268 0.20 5.36 25,000,000.00 1.00 27.77 Amount of shares 5,000.00 Interest 4,698,812.83

2. PLANNING OF THE RESULT STATEMENTS

 MATRIX 1 MATRIX 2 MATRIX 3 MATRIX 4 UAII 6,475,395.00 6,475,395.00 6,475,395.00 6,475,395.00 (Interest) Payment of: Loans to short t. 2,759,110.59 1,724,444.12 1,379,555.30 689,777.65 Loans to long t. 268,241.79 804,725.38 1,609,450.77 2,414,176.15 Labor Liabilities 253,650.06 253,650.06 253,650.06 253,650.06 Bonuses 268,241.79 1,072,967.18 1,072,967.18 1,341,208.97 Total interest 3,549,244.24 3,855,786.74 4,315,623.30 4,698,812.83 UAI 2,926,150.76 2,619,608.26 2,159,771.70 1,776,582.17 (Taxes 35%) 1,024,152.76 916,862.89 755,920.09 621,803.76 Net profit 1,901,997.99 1,702,745.37 1,403,851.60 1,154,778.41 Amount of shares 4,000.00 4,000.00 6,000.00 7,000.00 Profit per share 475.50 425.69 233.98 164.97

4. APPRAISAL OF THE FINANCIAL LEVERAGE

In order to obtain the Financial Leverage we took the best profit per share and we compared it with the lowest.

ANALYSIS

The matrix four has a greater payment of interests which brings a greater level of financial risk, because exists the possibility of failing the obligations problem.

The financial leverage gives a good idea of the beneficial thing that could be an increase in the dangerous net profit or that could be a decrease, giving an approximated measurement of the financial risk which a certain level of indebtedness the company incurs. While the greater the level of indebtedness the financial risk.