Financial operating leverage

The decisions that are made in the management of the companies, sometimes, lead to accepting fixed costs to obtain the use of certain material and financial resources.

Introduction

Leverage is the result of decisions made in business management and refers to the fact that, on certain occasions, company management resolves to assume fixed costs to obtain the use of certain resources, whether material or financial. For example, the use of external sources of financing, that is, financial leverage, entails the payment of a fixed price that is quantified with the agreed interest rate. Similarly, the use of capital goods for which the company incurs a fixed cost is called operating leverage.

In its most frequent approach and application, the analysis of leverage helps to assess - with a short-term perspective - some uncertainties that surround the operation of organizations and that impact on their results.

The term leverage is often used to describe the ability of companies to employ fixed-cost assets or funds that maximize returns in favor of their owners. The increase also increases the uncertainty in the yields, and at the same time increases the possible volume of these.

Leverage comes in different degrees; The higher the degree of leverage, the greater the risk, but the higher the expected returns will also be. The term risk is defined, in this context, to the degree of uncertainty related to the entity's ability to cover its payments of fixed obligations. The magnitude of leverage in the entity's structure shows the type of risk-return alternative that it possesses.

The income statement in relation to leverage

The Profit and Loss Statement also known as ¨ Income Statement ¨, ¨ Performance Statement ¨, etc., shows the effects of a company's operations and its final result in a given period, in the form of a profit or loss. Thus, this Financial Statement provides a summary of the significant events that gave rise to variations in the entity's equity or capital during a given period.

Financial Content

• Main income Costs associated with production Expenses associated with the operation Expenses related to financing Expenses related to the tax regime Result

Example:

Statement of income
Company ¨M¨, December x year xx
CONCEPT:	PARTIAL	BALANCE
Sales revenue		$ 100,000
(-) Production costs	60,000
Gross profit	40,000
(-) Operating costs:	15,000
Distribution and Sales	6,000
General and Administration	5,500
Other Operating Expenses	3,500
Income from Operations (UAII)		25,000
(-) Financial Expenses (Interest)	2,500
Income Before Tax	22,500
(-) Income Tax (35%)	7,875
Owners Disposable Income	$ 14,625

Financial operating leverage

The relationship between sales revenue (net sales) and earnings before interest and taxes determines the company's operating leverage, while the link between earnings before interest and taxes and the profit available to owners determines the financial leverage.

Operating Leverage

When the operational function in the company is defined, the combination of human resources and physical capital that will be used to produce, sell and manage a certain amount of goods is established; this, in turn, determines the cost structure, that is, the relative participation that the fixed and variable components have in the total.

Operating leverage results from the existence of fixed operating expenses. These fixed costs do not vary in relation to sales and must be paid regardless of the amount of income available.

Types of Costs

In relation to the production volume, costs can be classified into fixed and variable, so the production cost and operating expenses have components of fixed and variable costs.

Fixed Costs: They are a function of time and not the volume of production, they do not express a magnitude that is proportional to the company's production levels. They represent obligations that must be met in each accounting period. An example is leases and depreciations.

Variable Costs: They are a function of production volume and not of time, they are directly related to production levels. Consumption of raw materials, in the production of goods, is an example.

The graphical representation of both curves would allow us to see how as we move on the horizontal axis (units produced) to the right of the graph, the fixed cost curve does not change in relation to the value represented on its vertical axis (costs) since that she is independent of the quantities produced. This is not shown in the same way in relation to the representative line of variable costs, in this case as the number of units increases, the associated variable costs increase, with accepted theory, proportionally. (See graphic)

Financial operating leverage

Costs and operating leverage

Using the classification of costs in relation to production volume and considering that both production cost and operating expenses can be grouped into fixed and variable costs, Table 1 would be modified as follows:

Net sales

Less: Fixed operating costs

Variable operating costs

Earnings before interest and tax (UAII)

Illustrative example

Returning to the data with which the Income Statement model was presented, the following example is developed.

A company sells its products at $ 5.00 per unit, has variable operating costs of $ 3.25 per unit sold, while its fixed operating costs amount to $ 10,000.00.

Units: 20,000

Net Sales $ 100,000.00

Less: Variable operating costs 65,000.00

Fixed costs operation 10,000.00

UAII $ 25,000.00

What if this company's net sales fluctuated 10% above and below its current operating level?

What would be the effects on the UAII suffered by the company in the face of decreases and increases in its sales levels?

Table no. two

	Scenarios
Concept:	10% reduction	Current situation	Increase 10%
Units:	18,000	20,000	22,000
Net sales	$ 90,000.00	$ 100,000.00	$ 110,000.00
Variable costs	58,500.00	65,000.00	71,500.00
Fixed costs	10,000.00	10,000.00	10,000.00
UAII	$ 21,500.00	$ 25,000.00	$ 28,500.00

Note that a 10% reduction in company sales would produce a decrease in UAII of 14% (from $ 25,000.00 to $ 21,500.00), while an increase in sales of 10% would lead to an increase in UAII of 14%.

Therefore: the company's operating leverage can be defined as the company's ability to use its fixed operating costs to maximize the effects of fluctuations in sales on UAII.

Operating leverage works both ways and is present whenever there are fixed costs in a company's cost structure. An increase in sales would produce a more than proportional increase in UAII, while a reduction in these would result in a more than proportional decrease in UAII.

Alternatively, operating leverage could be defined from the determination of its GAO, or degree of operating leverage.

Degree of Operating Leverage. (Taken from: Evaluation of Investment Projects. 2003. Julio César Porteiro)

The degree of operating leverage of a company (GAO) is defined as the coefficient that measures the relationship between the relative change experienced by Earnings before Interest and Taxes (UAII), in the face of a relative variation in its volume of activity, expressed as through Total Sales Income (IVT), is expressed from the following formula:

Financial operating leverage

Relative variation of UAII

It is determined by applying the following formula:

Financial operating leverage

Where:

U: Quantity units sold and ∆U, is the change in units sold

Q: selling price

CV u: unit variable costs

CF: fixed costs

Relative variation in ITV

For a constant price, the relative variation in sales revenue can be determined as follows:

Financial operating leverage

Substituting in the general equation:

Financial operating leverage

Concluding:

Financial operating leverage

The numerator of the equation represents the total contribution margin, while the denominator determines the value of the UAII.

Example:

Returning to the example data

Financial operating leverage

Solving the equation:

Financial operating leverage

This means that for an increase or decrease in the activity level of 10%, the UAII will increase or decrease by 14%, that is, when sales amount to 22,000 units, the UAII will increase from $ 25,000 to $ 28,500; for a 10% reduction in sales, the UAII will drop from $ 25,000 to $ 21,500, as described in the rationale for table no. two.

The assumption for establishing this type of relationship is that they are linear, so the conclusions are valid for any increase or decrease in activity levels. If sales increase by 20%, the UAII will grow by 28% (from $ 25,000 to $ 32,000), if they are reduced by the same value, the result will be the same but in reverse.

Operating Leverage and Balance Point.

Break-even analysis is closely related to the concept of operating leverage. It allows the company to:

1. Determine what level of operations you must maintain to cover all your costs. Evaluate profitability or lack of profitability for different levels of sales.

A method of generalized use in practice, for its determination, is algebraic, which uses the following as a calculation equation:

Financial operating leverage

where the numerator is represented by the volume of fixed operating costs and the denominator by the marginal contribution margin.

This equation starts from the principle that Income is equal to Expenses, being, Income = P * U, and Expenses = C.VT + CF C.VT can be expressed as C.VU * (U). Substituting in the equality condition that supports the equilibrium principle we have: P * U = (U * C.VU) + CF The unknown in this case is to be able to know the values ​​of U (units) that enforce the equilibrium condition, solving for the formula: P (U) - CV u (U) = CF and solving we would then arrive at the equation shown above. The result shows the equilibrium for a given quantity of units, which multiplied by their sale price would show the equilibrium, in this case, in monetary values.

Fixed and variable costs that includes the calculation of the break-even point, excludes those related to financing activities, bone, focuses its analysis only on those costs resulting from the operation of the company, in other words, those that allow determining the level of the UAII.

The reader must have understood that this description of the equilibrium point differs a little from that where equilibrium is determined for the total costs of the company, in this case, the analysis is carried out to determine the level of operations they make. Zero the UAII.

Example:

Financial operating leverage

With sales below 5,714 units ($ 28,570.00), the UAII becomes negative (losses), the absolute amount of UAII increases as the company manages to sell above 5,714 units.

As you will have basically appreciated, there are three variables that determine the equilibrium point, say the sale price, the fixed cost and the unit variable cost, increases or decreases in these variables would condition new changes in the equilibrium volumes, now, what would happen with the leverage operational before changes in the equilibrium point.

Variations in fixed cost

An increase in the fixed cost would bring about an increase in the break-even point, while a decrease would reduce it. In the example, fixed costs amount to $ 10,000, if these increased by $ 5,000.00, the balance would be reached in 8,571 units and the GAO would go from 1.40 to 1.75, therefore, the greater the share of fixed costs In the cost structure of the company, the greater the degree of operating leverage and the greater the risk in its operations, since to make the UAII zero would require a greater volume of units to produce and sell. Conversely, if the fixed costs were reduced by $ 5,000.00, the break-even point would be reached in 2,857 units, the GAO would decrease from 1.40, in a normal situation, to 1.17 with the new changes,reducing leverage and operational risk in the company.

CONCEPT	NORMAL SITUATION	FIXED COST INCREASE	FIXED COST REDUCTION
UNITS	20,000	20,000	20,000
PRICE	5.00	5.00	5.00
AMOUNT	100,000	100,000	100,000
VARIABLE COST (U)	3.25	3.25	3.25
TOTAL VARIABLE COST	65,000	65,000	65,000
FIXED COST	10,000	15,000	5,000
TOTAL COST	75,000	80,000	70,000
UAII	25,000	20,000	30,000
BALANCE POINT (U)	5,714	8,571	2,857
BALANCE POINT ($)	28,571.4	42,857.1	14,285.7
GAO	1.40	1.75	1.17

Variations in the marginal contribution margin

The marginal contribution margin depends on both the price variable (P) and the unit variable cost (CV u), changes in one or the other, lead to variations in the equilibrium quantities. If the unit variable cost increases (situation 1), the margin contracts, as a condition of constancy in the rest of the variables and therefore a greater volume of production would be needed to reach equilibrium, in the same way it would happen if the one that decreased whatever the price (situation 2), the effects on the break-even point are the same. In both cases the GAO increases, and therefore the operational risk. An inverse situation where there was a reduction in the unit variable cost (situation 3) or an increase in the price (situation 4), both would contribute to expanding the margin,reducing production and sales levels that promote the balance between income and expenses, reducing GAO and risk in operations.

CONCEPT:	NORMAL SITUATION	SITUATION 1	SITUATION 2	SITUATION 3	SITUATION 4
UNITS	20,000	20,000	20,000	20,000	20,000
PRICE	5.00	5.00	4.50	5.00	5.50
AMOUNT	100,000	100,000	90,000	100,000	110,000
VARIABLE COST (u)	3.25	3.58	3.25	2.93	3.25
TOTAL VARIABLE COST	65,000	71,500	65,000	58,500	65,000
FIXED COST	10,000	10,000	10,000	10,000	10,000
TOTAL COST	75,000	81,500	75,000	68,500	75,000
UAII	25,000	18,500	15,000	31,500	35,000
BALANCE POINT (U)	5,714	7,018	8,000	4,819	4,444
BALANCE POINT ($)	28,571.4	35,087.7	36,000.0	24,096.4	24,444.4
GAO	1.40	1.54	1.67	1.32	1.29

Therefore, variations in prices, fixed and variable costs produce changes in the equilibrium levels of the company and its degree of leverage, but note that the increase in fixed costs has an even greater effect on the equilibrium point and its degree of operating leverage.

Profitability assessment for different levels of sales.

Based on the examples previously developed, we have been able to verify that the higher the level of fixed costs, the greater the degree of operational smoothness of the company. Now, how does the behavior of fixed costs influence profitability when fluctuating sales levels?

To exemplify the answer to the previous question, we propose three different situations. The first shows the normal trading levels with which we have developed the examples shown above, the second and third introduces negative and positive trading variations.

CONCEPT:	Sales reduction 50%	Normal	Sales increase 50%
UNITS	10,000	20,000	30,000
PRICE	5.00	$ 5.00	5.00
AMOUNT	50,000	100,000	150,000
CV (t)	32,500	65,000	97,500
CF	10,000	10,000	10,000
CT	42,500	75,000	107,500
UAII	7,500	$ 25,000	42,500
GAO		1.40

A reduction in sales levels by 50% introduces a more than proportional negative variation in UAII of 70%. In this case, leverage acts negatively, introducing a higher relative variation in UAII.

On the contrary, an increase in the level of operation by 50% would favor a more proportional variation in the UAII, increasing them by 70%, favoring in this case the leverage, the profitability of the company.

Another example of how the degree of leverage influences the profitability of organizations, for different levels of sales, could be described from the following example.

Let ¨M¨ and ¨X¨ be two companies of similar activity. These present identical levels of unit sales, prices and unit variable costs, the difference lies in the fixed cost structure defined for both, as shown in the table.

CONCEPT:	Company ¨M¨	¨X¨ Company
UNITS	20,000	20,000
PRICE	5.00	$ 5.00
AMOUNT	100,000	100,000
CV (t)	65,000	65,000
CF	10,000	15,000
CT	75,000	80,000
UAII	25,000	20.00
GAO	1.40	1.75

Note that the company ¨M¨ presents $ 5000 more than UAII, compared to the company ¨X¨ given that its fixed cost structure is lower by the same amount, so the GAO for the company ¨M¨ is lower as Table shows, that is, the company "M" is less leveraged than the company "X". What effects on the UAII would bring, for both, variations in their sales levels?

Let's say that sales contracted 50%, the operational information for both companies would be as follows.

CONCEPT:	Company M	Company X
UNITS	10,000	10,000
PRICE	$ 5.00	$ 5.00
AMOUNT	50,000	50,000
CV (t)	32,500	32,500
CF	10,000	15,000
CT	42,500	47,500
UAII	$ 7,500	$ 2,500

This fluctuation of 50% favors the UAII of the company ¨M¨ to be reduced by 70% according to its GAO defined above, while in the case of the company ¨X¨, the UAII are reduced by 87.5%. This leads us to the affirmation that the higher the GAO, defined from the structure of fixed costs, in a company, the greater the risk associated with it in the face of decreases in its levels of operations, so the level of leverage acts, in this case, with a negative incidence of greater or lesser degree on one or the other.

Another situation arises if the sales of both companies increase by 50%, the information would be presented below.

CONCEPT:	Company M	Company X
UNITS	30,000	30,000
PRICE	$ 5.00	$ 5.00
AMOUNT	150,000	150,000
CV (t)	97,500	97,500
CF	10,000	15,000
CT	107,500	112,500
UAII	42,500	37,500

Simply, it can be verified that the UAII of the company ¨M¨ are greater than those reached by the company ¨X¨ but, the first only increases them by 70%, while the second by 87.5%, so that in terms of profitability the variations experienced by the ¨X¨ company are more significant than those of its counterpart. In this case, the effect of leverage acts positively on both, favoring company ¨X¨ to a greater degree because it has a higher defined degree of leverage.

Financial appeceament

So far we have seen how a company, from a defined structure of fixed operating costs, can take full advantage of the effects of fluctuations in its sales, on profits before interest and taxes.

There are fixed costs, which an organization that has no relation to its operational processes must face: production, marketing, management, among others; They are directly linked to the way in which each company is financed, and have a direct impact on the determination of the final result, as well as on the return per unit of capital contributed by its owners.

While operating leverage is supported by the constancy of fixed operating costs, financial leverage finds its axis in the fixed costs that originate the interests linked to the use of external financing.

These fixed charges do not vary with the UAII, they must be paid independently if the amount of these is sufficient to cover them. Financial leverage is defined as: the ability of the company to use its fixed financial charges to increase the effects of variations in earnings before interest and income taxes per peso of invested capital.

It should be noted that the cost of external financing is a deductible expense to determine the taxable profit on which the profit tax is settled.

Returning to the data of the Income Statement with which we have developed the examples, the final scheme for determining the final result would be:

Concept:	Balance
Operating Profits (UAII)	$ 25,000
(-) Financial expenses (interest)	2,500
Income before taxes	22,500
Income Tax (35%)	7,875
Utilities to distribute	$ 14,625

Now, what would be the effects of variations above and below the current level of UAII, on the final result for owners (per unit of capital contributed) (RFPu), if we were to base ourselves on the hypothesis that the contribution of these amount to $ 100,000?

	Scenarios
Concept:	20% reduction	Current situation	20% increase
UAII	$ 20,000.00	$ 25,000.00	$ 30,000.00
(-) Interest	2,500.00	2,500.00	2,500.00
UAI	17,500.00	22,500.00	27,500.00
(-) Taxes (35%)	6,125.00	7,875.00	9,625.00
Utility to Distribute	$ 11,350.00	$ 14,625.00	$ 17,875.00
Capital Profit / $	0.113	0.146	0.179

Note that a negative variation of 20% of UAII introduces a reduction in RFPu of 23%, while an increase in UAII of equal magnitude increases RFPu by 23% as well. In this case, financial leverage works both ways. Therefore, financial leverage can be expressed as:

Financial operating leverage

In both cases the coefficient is greater than 1 and there is financial leverage.

Not only in the face of changes in the UAII can the effect of financial leverage be seen. As previously discussed, the origin of this is found in the fixed costs that determine the interest payments caused by the use of external sources of financing. Therefore, the effects of the financial lever on the RFPu can also be seen in the face of different eligible financing structures.

In order to exemplify the above approach, three situations are proposed, among many others possible, where in the first case, external sources of financing are not recognized, so the leverage effect is considered null, the second determines a capitalizable structure of the 50%, bone $ 50,000 and the third 75%, which represent $ 75,000 of obligations. The interest rate on debts is 10% in both situations.

Concept:	Base Case	Case 1. Debt 50%	Case 2. Debt 75%
UAII	25,000	25,000	25,000
(-) Interest	0.00	5,000	7,500
UAI	25,000	20,000	17,500
(-) Taxes (35%)	8,750	7,000	6,125
Utility available	16,250	13,000	11,375
RFP u	0.1625	0.26	0.455

Note: In order to adjust the accuracy of the results, rounding of figures is not recommended.

Auxiliary calculations:

	Rate	Debt	Interest
Case 1	0.10	50,000	5,000
Case 2.	0.10	75,000	7,500

The three alternatives assume the same level of operations, where the RFPu increases with leverage. While in the base case, where the existence of liabilities is not recognized, the gain per peso of invested capital is 16 cents, in the rest of the cases the yield increases to 45 cents.

The results show the incidence of positive leverage, which occurs when funds other than an interest rate are obtained that are lower than the percentage of return that the invested assets generate, comparing both rates after interest and taxes.

In the example, the cost of debt after interest and taxes is 6.5%, while the return on assets is 16%, the difference between the two produces a surplus that remunerates own funds.

Case 1.

(0.1625 - 0.065) * 50,000 = 4,875

If we add to this $ 4,875 the $ 8,125 contributed by own funds (0.1625 * 50,000) we will obtain the $ 13,000 of profit to distribute.

Case 2.

(0.1625 - 0.065) * 75,000 = 7,312.5

(0.1625 * 25,000) = 4,062.5

Profit to distribute $ 11,375

A contrary situation would occur if the cost associated with the use of foreign funds were higher than the return produced by the assets. In this case, the consequence is a deterioration in the return per unit of capital contributed.

In Case 2, where third-party financing amounts to $ 75,000 (75%), the maximum interest rate supported by the UAII so that the return per unit of capital contributed is at least the same return on assets, is 25%

(Debt cost (after interest and taxes) = Active income)

(i (1 - 0.35) = 0.1625); (i = 0.1625 / 0.65); (i = 25%)

Therefore, any interest rate on external financing above 25% would produce a subsidy from own funds to external funds.

Suppose an interest rate of 30%

Note how as the interest rate on loans increases, the result yields a profit of $ 1,625 and RFPu is 6.5 cts, notably less than 16 cts in the case of no debt. Here leverage works negatively where owners sacrifice part of the return on their contributed funds to cover the cost of the obligation incurred.

Obligation cost (after tax)	75,000 * 0.30 (1 - 0.35)	14,625
Return of assets on foreign funds	0.1625 * 75,000	12,187.5
Profit applied to financing foreign funds	14,625 - 12,187.5	2,437.5
Return of assets on own funds	0.1625 * 25,000	4,062.5
Subsidy own funds to other funds		2,437.5
Final return for owners	4,062.5 - 2,437.5	1,625
Return per unit of contributed capital	1,625 / 25,000	6.5 cts

We had previously argued that financial leverage was associated with the company's ability to use its financial fixed costs to increase the effects of variations in the UAII, on the return for owners by weight ($) of contributed capital; In other words, financial leverage can be measured from the ratio of the percentage change in the RFPu produced by changes in the UAII. The coefficient that results from this ratio must be greater than unity and as it increases above this value, the greater the degree of financial leverage.

Degree of Financial Leverage. (Taken from: Evaluation of Investment Projects. 2003. Julio César Porteiro)

The degree of financial leverage (GAF) is defined as: the coefficient that measures the link between the relative change that occurs in the Final Result for Owners per unit of invested capital (RFPU), compared to a relative variation in Profit before Interest and Taxes (UAII).

The implicit assumption of the approach assumes a linear relationship, and therefore, the index is valid for any percentage of change in the UAII. The GAF is the coefficient of elasticity of the function that relates the dependent variable RFPU and the independent variable UAII.

Financial operating leverage

Being:

Financial operating leverage

Where:

I: Interests

t: Tax rate

Substituting values

Financial operating leverage

Finally:

Financial operating leverage

The preceding expression indicates that the degree of financial leverage at a point results from the quotient between earnings before interest and tax and earnings after interest and before tax.

To exemplify the previous reasoning above, we return to Case 2 where the debt amounts to $ 75,000, (75%) at an interest rate of 10%. Owner financing will be $ 25,000

Financial operating leverage

The result indicates that if the UAII increases by 10%, the profit available to owners increases by 14.28%, going from $ 11,375 to $ 13,000.

Concept:	Case 2. Debt 75%	UAII increase 10%
UAII	25,000	27,500
(-) Interest	7,500	7,500
UAI	17,500	20,000
(-) Taxes (35%)	6,125	7,000
Utility available	11,375	13,000
RFP u	0.45	0.52

Thus, if the contribution made by the owners was $ 25,000, the RFPu would go from 45 to 52 cts.

Alternatively, if the UAII were increased by 20%, the profit available to the owners would reach a value of $ 14,625, where the RFPu would amount to 58 cts.

Conclusions

The management of a company leads to the use of certain resources: material, human or financial. This favors the existence of fixed costs in its operation.

Fixed costs related to the operation of the company give rise to operating leverage, while financing policies (which recognize the existence of foreign funds) which usually introduce fixed costs for the payment of obligations linked to them, originate the financial lever.

Operating leverage defines the risk associated with the operation of the company, since, as fixed costs increase, it will need a higher volume of sales to cover them and generate adequate operating profit.

In exchange for an increase in the levels of risk associated with the operation, the company achieves high operating leverage. This is advantageous since if it were able to increase its sales levels, the UAII to obtain would grow in more than proportional terms to the growth of sales (the same would happen in the opposite way in case of reduction in sales levels).

The breakeven point is a good index of operational risk, the higher the fixed costs, the greater the operating leverage and the higher the levels of sales to be generated to meet the equilibrium condition. In the same way, the same would happen if the decreases occurred in the unit contribution margin, either due to price reduction or increases in unit variable costs.

The degree of operating leverage is another indicator of operational risk, the higher the fixed costs, the other factors, the higher the GAO.

Therefore, there is a direct relationship between fixed operating costs, break-even point, GAO and operating risk since an increase in structure costs, or accepting high structure costs, has a direct effect on risk and its Assessment indicators, in other words, high or increasing operating risks are justified on the basis of the increase in operating returns expected as a result of an increase in sales.

Financial risk is associated with the inability of the company to be unable to cover its financial expenses. These expenses constitute fixed costs associated with the financing mix chosen by the company.

As interest grows, the level of UAII necessary to cover them will be higher and therefore the financial leverage assumed by the company will be higher.

Foreign financing, although in many cases it comes with costs, reduces the financial effort to be made by those who provide capital. This situation can be exploited by the owners under certain conditions.

The main difficulty lies in obtaining funds whose cost after taxes is less than the return on assets, calculated, in the hypothesis, that these have been financed entirely by own funds; that is, the yield that the foreign funds contribute is higher than their cost after taxes.

A measure of financial risk is introduced by the Financial Leverage Rating (GAF). A GAF greater than one (1) is indicative of positive financial leverage and as it increases over the unit, the greater the leverage, risk and final result for owners by weight ($) of contributed capital.

High financial leverage would only be advisable to the extent that the UAII increases are sufficient to cover the fixed costs for financial charges, leading to an increase in the profitability of their owners per ($) of contributed capital.

Bibliography

• Amat Oriol. Financial Economic Analysis, 16th Edition. 2000.General Accounting Study. Basic Text of the course General Accounting I, in the Bachelor of Accounting and Finance, Universidad de Matanzas. Gitman, L. 1993. Fundamentals of Financial Administration. Mexico. 1993.Porteiro Julio César. Evaluation of investment projects. Business perspective. University Culture Foundation, Uruguay, 2007.