how to deal with sale of A/R?

CFA Level II
#1

if A/R is sold,cash in and A/R out both in the left side of B/S,so does it affect financial leverage

#2

No I don’t think it should affect financial leverage. That’s debt/equity right?

#3

Degree of financial leverage= (% Change in EPS)/(% Change in EBIT) Therefore, selling AR has no effect on Financial Leverage.

#4

it should depend on with/without recourse??

#5

neilzuo Wrote: ------------------------------------------------------- > if A/R is sold,cash in and A/R out both in the > left side of B/S,so does it affect financial > leverage suppose it is with recourse. and a question on textbook reading 26 P361 according to answer,when sale of A/R,both asset and liability are added some amount, so A/E is enlarged. but I don’t know why.

#6

CarpeCFALII, you’re mixing apples and oranges. Degree of Fin’l Leverage is not the financial leverage we’re talking about here. Analysts should addback the sale of A/R assets with recourse by creating an asset and liability by the same amount. That will increase leverage, which in this case is: Assets / Equity. The financial leverage here is the end of the Dupont ROE equation (NPM X Total Asset Turnover X Financial Leverage). __________________________ The financial leverage that CarpeCFALII is referring to addresses the leverage indicated on a firm’s income statement. DFL x DOL = DTL. DFL = Degree of Financial Leverage = (% change NI) / (% change EBIT) DOL = Degree of Operating Leverage = (% change EBIT) / (% change Rev) DOL = Q (P-V)/ Q(P-V) - C DFL = Q (P-V) - C / Q (P-V) - C - I

#7

I think that the CFAI book assumes that when you sell AR, you will use the proceeds to pay debt (AR down, debt down), notice that no cash is recorded. Thus, with recourse, the liability is still burdened on you, thus need to adjust by reverse the sale (AR up, debt up); leading to A/E increases.