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Study Session 11: Corporate Finance: Leverage, Dividends and Share Repurchases, and Working Capital Management

Question on magnifying effect of leverage

Hello everyone,

I’ve been studying Reading #34 - Measures of Leverage, of L1, and I encountered the following statements near the end of chapter of the curriculum and Schweser, respectively:

GGM model

Hi there,

Suppose a company just paid dividends and its stock price now is 20 dollars. Company is going to pay dividends every year and the next dividend would be 90 cents and would grow at 2% rate after. Current risk premium is 6% and the risk-free rate is 4%. What is the implied beta of equity of this company? 

This is actually a question from my university. I thought it’s just a simple question about GGM model. But the solution is:

re = d1/p0 + g = 0.95/20 + 2% = 6.75%

Investing Activities?

In the Measures of Leverage topic, I can’t help but wonder why Investing Activities are not discussed at all, only business risk and financial risk are discussed. Does anyone know why investing activities aren’t part of the picture?

Computation of Risk Premium with Real Rate retur

Hi everyone,

I have a problem with Practice Questions 13 and 14 of Reading 39 (regarding computation of risk premium) and the errata published by the CFA. I don’t understand why they change the numerator with (1 + 0.080) whereas the formula in the curriculum seemed more consistent with the previous answer.  All the info are below (related to question 13) 

Financial and operating leverage

Statement 1: A company’s degree of financial leverage is different at different number of units produced and sold.

Statement 2: A company’s degree of operating leverage is different at different levels of operating earnings.

Which one(s) correct?

Operating break even

Rodgers, inc. has fixed operating expense of $2 million and will break even with sales of $5 million. For sales of $7 million, an analyst would estimate the firm’s operating income as:
A:$800,000
B:$1,200,000
C:$2,000,000

Does anybody know how to solve it? thank you!

Measures of Leverage

[question removed by moderator]

This is a question in Institute end of the chapter qs. I had a doubt as to why isn’t Option A correct, because as debt increase Net income decreases so sensitivity of net income to changes in unit sales of Grundlegend must be lower. 
Can anyone please help me out.

Corporate Finance Practice Problem

Hi All,

I’m currently busy with the preparations of the exam for Level 1.

There seems to be a practice problem I can’t understand. It is the practice problem nr 4 of Reading 35 - Cost of Capital.

I can’t figure out how to use the calculator for this. I keep receiving the Error 5 or Error 7 when using the BA 2 Plus Texas Instruments.

Would there be someone that can help me out here?

Thanks.