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Essay / Research Paper Abstract
8 pages. The sensitivity of a firm's operating profits to changes in demands as well as the opportunities and risks presented by such a cost structure is addressed in this paper with a focus on the airlines industry. With a current debt load of more than $110 billion, the airline industry is not likely to see a rebound any time soon. The Uniform System of Accounts as required by the Department of Transportation is utilized. Bibliography lists 6 sources.
Page Count:
8 pages (~225 words per page)
File: D0_JGAaircs.rtf
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Unformatted sample text from the term paper:
airlines industry. The Uniform System of Accounts as required by the Department of Transportation is utilized. THE CONCEPT OF OPERATING LEVERAGE There is a clear difference between business
risk and financial risk. Each one has its own effect on the cost of finance. In examining these differences and the subsequent effect each has on capital structure
of an airlines as well as the difference between the cost of equity capital and debt capital, financial managers can make knowledgeable business decisions. The term business risk is generally
not a well-defined one. More often than not the term is combined with operating risk. Business risk is created when there is a covariance of sales of any
particular industry, in this case the airline industry, with its market return. The likelihood that an airlines actual net operating profit will differ from its expected output is another
way of describing business risk. Operating leverage directly affects differences between expected and actual net operating profit amounts. An airlines with little or no operating leverage will have
small changes in net operating profit as output changes when compared with an airline having a great deal of operating leverage. In this way the more operating leverage an
airline has, the greater its business risk will be. Despite the fact that many analysts feel that business risk is one of the major determining factors of the capital structure
of an airline or any company, the existing research does not provide a definitive answer as to whether an increase in business risk should cause it to lower its level
of debt in its capital structure. Many textbooks, in fact, affirm that there is an inverse relationship between the optimal debt level and business risk. The reasoning behind
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