The most comprehensive educational resources for finance

Degree of Total Leverage

Using the formulas for Degree of Operating Leverage (DOL) and Degree of Financial Leverage (DFL), we can calculate the degree of total leverage (DTL) for the firm as follows: In the above formula, you can observe that if there are no fixed operating costs and fixed financing costs, there is no leverage, and DTL will

Degree of Financial Leverage

Financial leverage arises when a firm has fixed financing costs in its income stream. The presence of financial leverage magnifies the effects of changes in sales to the firm’s net earnings. Sources of financial leverage are primarily debt and preferred stock. The British expression for financial leverage is gearing. The degree of financial leverage is

How to Calculate Degree of Operating Leverage

Operating leverage arises when a firm has fixed operating costs in its income stream. The presence of operating leverage magnifies the effects of changes in sales to the firm’s operating earnings, i.e., a change in the volume of sales results in a “more than proportional” change in operating profit (or loss). The degree of operating

Put Option Payoff

A put option is the right, but not the obligation, to sell an asset at a prespecified price on, or before, a prespecified date in the future. Long Put The payoff diagram of a put option looks like a mirror image of the call option (along the Y axis). Consider a put option with a

Global Depositary Receipts

Global Depositary Receipts (GDRs) give issuers exposure to the global markets outside their home market. Depositary receipts are negotiable certificates issued by a bank to represent the underlying shares of stock. The underlying shares are held in trust at a foreign custodian bank. GDRs refer to certificates traded outside the US. Even though they may not

American Depositary Receipts (ADRs)

American Depositary Receipts (ADRs) offer the issuing company access to the US capital market and at the same time provide investors in the US with a convenient way to directly invest in international companies. ADRs are dollar-denominated securities that trade, clear and settle like any other US security. They are a negotiable instrument that represents

Class A and Class B Common Stock

A company can also issue various classes of common stock, such as Class A and Class B, with each class having different features. One class may have higher voting power, while the other may have higher dividends. For example, Class A shares may have 1 vote per share and 100% of dividends. Class B shares

Voting Systems: Statutory Voting and Cumulative Voting

Common shares provide voting rights to the shareholders which provide the shareholders the ability to participate in major corporate decisions such as election of directors, mergers and acquisitions, selection of auditors, etc. When electing the members of the board of directors, there are two commonly used methods of voting: Statutory Voting and Cumulative Voting. Under the

Convertible Preference Shares

Convertible preference shares give the preference shareholders the right to convert their shares into a specified number of common shares. The ratio of how many common shares an investor will get for each preference share is called conversion ratio. An investor has many advantages in buying convertible preference shares instead of directly buying common shares.

Preference Shares – Meaning, Types and Features

Preference shares are another type of equity securities issued by firms that combine the features of common shares as well as debt securities. Just like common shares, they do not mature, and can have features such as call and put options. However, like interest payments in debt securities, holders of preferred shares receive fixed payments