3. Total Leverage and Breakeven Points
d. calculate the breakeven quantity of sales and determine the company's net income at various sales levels;
e. calculate and interpret the operating breakeven quantity of sales.
How does the use of greater amounts of debt in the capital structure raise both the cost of debt and the cost of equity capital?
- The higher the percentage of debt, the riskier the debt, hence the higher the interest rate creditors will charge.
- In general, increasing the use of debt increases the expected rate of return, but more debt also means that the firm's stockholders must bear more risk.
Do creditors or stockholders have priority in a bankruptcy proceeding?
Creditors have priority over stockholders in a bankruptcy proceeding.