This chapter is different from the previous three chapters for it begins with the analytical angle of investors. Here below are the discussion topics that you shall try to answer 4 of them and write a comment to student?s respond.

This chapter is about Expanded Analysis. This chapter is different from the previous three chapters for it begins with the analytical angle of investors. Here below are the discussion topics that you shall try to answer 4 of them and write a comment to student's respond. 1. 2. 3. 4. 5. 6. 7. What is financial leverage? Why is it so important for a company? What are the advantages and disadvantages of financial leverage? What is the degree of financial leverage? Use the two approaches to illustrate the effect of financial leverage on financial performance of a company. What is the basic earnings per share, and what is the diluted earnings per share? Why do we need to have the two? If a company has diluting factors, why does that cause some concerns? Price to earnings ratio, or PE ratio, is considered the most important ratio for financial analysis. Why is that so? And, what are the shortcomings and strength of the ratio? Companies pay out some net income as dividends, and also keep some as retained earnings. What are the purposes to distribute dividends? And, what are the main purposes to keep some net income as retained earnings? What are the usefulness of dividend yield and book value per share in financial analysis? Illustrate your points with numerical examples. Define stock options, restricted stock rights, and stock appreciation rights. What are the main advantages and disadvantages of each? Please comment to this student's respond: 1. What is financial leverage? Why is it so important for a company? What are the advantages and disadvantages of financial leverage? The financial leverage is the use of financing with fixed charge (such as interest, debt, and preferred equity). The more debt financing a company uses, the higher its financial leverage. High degree of leverage means high interest payments, which negatively affect the company's bottom-line earning per share. Advantage of financial leverage: (1) magnification of shareholder profits. For an ex. If profits increase by 10%, the shareholders dividends or share value will increase by 10% (2) improvement in credit rating. If firms can handle risk associated with carrying debt, it can improve credit rating; thus, get additional financing at better interest rates. (3) Capturing economies of scale. Firm can operate more efficiently when conducted on a larger scale. An ex is industrial mass production can lower unit cost to produce goods. (4) increase free cash. Firm can pay debt in smaller installments over a period of time, allowing funds to be free for more immediate use. For ex., if company can afford a new factory, but will be left with negligible free cash, it may be better to finance the factory and spend the cash for inputs, labors, or use as a reserve against unforeseen circumstances. Disadvantage would be if the debt becomes too costly, it reduces the return of equity below the return of assets. Firms may have difficulty making payments, difficult to obtain additional financing from lenders. 1. What is the degree of financial leverage? Use the two approaches to illustrate the effect of financial leverage on financial performance of a company. Degree of financial leverage (DFL) is a ratio that measures the sensitivity of a company's earnings per share (EPS)to fluctuations in its operating income, as a result of changes in its capital structure. There are two approaches: degree of financial leverage and allinclusive degree of financial leverage. Degree of financial leverage is the % change in net income to the % change in operating income. The higher the DFL the more the financial risk and the more sensitive the return of equity (ROE) is to changes in the unit produced and sold. It does not work when the income statement includes any of the following items: nonconrolling interest, equity income, nonrecurring items (discontinued operations and extraordinary items). When any of these are included then they should be eliminated from the numerator and denominator and the all inclusive formula should be used. The formula will eliminates the noncontrolling interest, equity income, and nonrecurring tiems from the degree of financial leverage. Write your comment here