Fiacial

In: Business and Management

Submitted By jjevens
Words 481
Pages 2
I believe that reason financial managers base their investment decisions based off of the current assets and current liabilities is because they need to see the financial position that the company is in before they choose to invest their money. If a company has a large amount of current liabilities in comparison to their current assets, this means they have more money they owe than they own. The current assets give value to the companys bottom line and the current liabilities take away from the companys bottom line. Current asset and liability balances can be viewed as a result of an investment decision because if the current assets are less than its liabilities, the company may have a negative net worth (Block, Hirt, & Danielson, 2010). The degree of operating leverage or DOL is defined as the percentage change in the operating income that occurs as a result of a percentage change in the units sold (Block, Hirt, & Danielson, 2010). When a company is highly leveraged, they will have an increase in income as their volume expands. When the DOL is computed close to the break-even point it will result in a higher number because of the increase in the operating income (Block, Hirt, & Danielson, 2010). There are leveraged firms and conservative firms. The DOL for a leveraged firm is higher than of a conservative firm. This means that in this example, the Hi Tech Manufacturing Company would be considered to be more leveraged than that the Old School. Financial leverage is the amount of debt used in the capital structure of the firm (Block, Hirt, & Danielson, 2010). The text pointed out that it is helpful to remember that the operating leverage primarily affects the left-hand side of the balance sheet and the financial leverage primarily affects the right-hand side of the balance sheet. The degree of financial leverage or DFL is defined as the percentage…...

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Words: 1229 - Pages: 5