Changes in sales cause changes in profits. Would the profit change associated with sales changes be larger or smaller if a firm increased its operating leverages? Explain your answer.
A firm is about to double its assets to serve its rapidly growing market. It must choose between a highly automated production process and a less automated one. It also must choose a capital structure for financing the expansion.
Should the asset investment and financing decisions be jointly determined, or should each decision be made separately?
How would these decisions affect one another?
How could the leverage concept be used to help management analyze the situation?
The cost of retained earnings is less than the cost of new outside equity capital. Consequently, it is totally irrational for a firm to sell a new issue of stock and to pay cash dividends during the same year.
Discuss the meaning of those statements.