leverage, the higher the financial risk, and the higher the cost of capital. Cost of capital
rises because it costs more to raise funds for a risky business.Operating leverage at a given level of sales (x) = % change in EBIT
% change in sales
Financial leverage at a given level of sales (x) = % change in EPS
% change in EBIT
Total leverage at a given level of sales (x) = % change in EPS
% change in sales
Or
TL = Operating Leverage *Financial Leverage
Short-term financing refers to financing that will be repaid in 1 year or less. The sources
of such financing are trade credit, bank loans, bankers’ acceptances, finance company
loans, commercial paper, receivable financing and inventory financing.Sources of long-term debt include mortgages and bonds. Mortgages represents note
payable that has as collateral real assets and require periodic payments. Mortgages can
be issued to finance the acquisition of assets, construction of plants, and modernization
of facilities.It is easier to obtain mortgage loans for multiple use real assets than for single use real
assets. Mortgages may be obtained from a bank, life insurance Company like National
Insurance Company in Sierra Leone (This company does both Life and general
insurance), or other financial institution.There are two kinds of mortgages, a senior mortgage (which has first claim on assets
and earnings) and a junior mortgage (which has a subordinate lien).Mortgages have a number of advantages, including favourable interest rates, less
financing restrictions, and extended maturity date for loan repayment. Long- term debt
principally takes the form of bonds payable and loans payable.A bond is a certificate indicating that the company has borrowed a given sum of money
that it agrees to repay at a future date. A written agreement called an indenture,
describes the features of the particular bond issue. The indenture (contracts) provides