Chapter 6

FINANCIAL LEVERAGE

INTRODUCTION

1.  THE COST OF THE CAPITAL

Knowing the number of deductible interests, we get to calculate the net profit of each alternative, and soon we divided it 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 a 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

MATRIX 2

MATRIX 3

MATRIX 4

2. PLANNING OF THE RESULT STATEMENTS

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

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.

AI Opinion: The financial leverage presented in José Saúl Velásquez's paper is positive in terms of providing an analytical and structured approach to evaluating a company's financing decisions. The author focuses on calculating financial leverage through the comparison of different capital structure alternatives, which is a sound approach for making informed financial decisions. Some key points to highlight are:
Analytical approach: The author proposes an analytical approach that takes into account the impact of different sources of financing on the capital structure of the company. This is essential to understanding how financing decisions affect the profitability and financial risk of the company.
Tax Consideration: The author considers the tax benefits of deductible interest, which is essential for calculating the effective cost of capital and net income after taxes.
Financial risk assessment: The author mentions that a higher level of debt entails greater financial risk. This is a crucial point, since financial leverage can increase the profitability of the company, but also exposes it to greater risk if debt obligations are not properly managed.
Focus on earnings per share: The author focuses on evaluating the impact of financing decisions on earnings per common share, which is relevant to shareholders and investors.
Overall, the author's approach is consistent with financial principles and provides a solid framework for financial decision making. However, it is important to remember that each company has unique circumstances, so it is essential to adapt these techniques to the company's specific situation and consider other factors, such as the industry, business cycle, and company strategy, when making decisions. of financing. Financial leverage can be a powerful tool, but it also carries risks that must be managed appropriately.

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