1) What do you mean by operating leverage? How, if at all, is it comparable to financial leverage? If firm has high operating leverage, would you expect it to have high or low financial leverage? Describe your reasoning in detail.

2) A broker wishes to sell a customer the investment costing= $100 with the expected payoff in 1 year of= $106. Customer points out that a 6% return is not very attractive. Broker responds by suggesting customer borrow= $90 for 1 year at 4% interest to help pay for investment.

i) Determine the customer’s expected return if she borrows money?

ii) Does borrowing money the investment more attractive?

iii) What does insignificance Proposition say about whether borrowing money makes investment more attractive?

Requirements: Min Pages: 1