Gauging the success of a company usually involves some assessment of the firms earnings. When evaluating earnings, investors should consider the quality and sources of the companys earnings, as well as their amount. In other words, the source of the earnings is as important a consideration as the size of the earnings.

Required:

Assume that you will be making a memo for the companys executive committee, and remember that the President detests sloppy, disorganized reports.

1) Discuss the differences between operating profits and the bottom lineprofits after all revenues and expenses. Draft by Nov 27th

2). Do you think a dollar of earnings coming from operations is any more or less valuable than a dollar of earnings generated from some other source below operating profits (e.g., one-time gains from selling assets or one-time write-offs for charges related to closing a plant)? Explain. Draft by Nov 27th

3) What is the concept of operating leverage? What is the relation between operating leverage and operating profits? Hint (Operating leverage is a ratio)

4) What is the concept of financial leverage? What is the relation between financial leverage and return on common shareholders equity?