LEVERAGE is a general term for any technique to multiply gains and losses.

[1] Leverage exists when an investor achieves the right to a return on a capital base that exceeds the investment which the investor has personally contributed to the entity or instrument achieving a return.[2] Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives

FINANCIAL LEVERAGE The use of borrowed money to increase production volume, and thus sales and earnings. It is measured as the ratio of total debt to total assets. The greater the amount of debt, the greater the financial leverage. Since interest is a fixed cost (which can be written off against revenue) a loan allows an organization to generate more earnings without a corresponding increase in the equity capital requiring increased dividend payments (which cannot be written off against the earnings). However, while high leverage may be beneficial in boom periods, it may cause seriouscash flow problems in recessionary periods because there might not be enough sales revenue to cover the interest payments. OPERATING LEVERAGE A measurement of the degree to which a firm or project incurs a combination of fixed and variable costs. 1. A business that makes few sales, with each sale providing a

very high gross margin, is said to be highly leveraged. A business that makes many sales, with each sale contributing a very slight margin, is said to be less leveraged. As the volume of sales in a business increases, each new sale contributes less to fixed costs and more to profitability. 2. A business that has a higher proportion of fixed costs and a lower proportion of variable costs is said to have used more operating leverage. Those businesses with lower fixed costs and higher variable costs are said to employ less operating leverage.

BREAK EVEN ANALYSIS An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Breakeven analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point. This is the amount that revenues can fall while still staying above the breakeven point.

TIME VALUE OF MONEY The time value of money is the value of money with a given amount of interest earned or inflation accrued over a given amount of time. The ultimate principle suggests that a certain amount of money today has different buying power than the same amount of money in the future. This notion exists both because there is an opportunity to earn interest on the money and because inflation will drive prices up, thus changing the "value" of the

money. The time value of money is the central concept in finance theory.

The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. Also referred to as "present discounted value".

WORKING CAPITAL Working capital (abbreviated WC) is a financial metric which representsoperating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy

both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

FUNCTION OF WORKING CAPITAL

Working capital is needed for the following purposes: (1) replenishment of inventory (2) provision of operating expenses (3) support for credit sales (4) provision of a safety margin

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Some standard calculations based on the time value of money are: Present value The current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or obligations.[2] Present value of an annuity An annuity is a series of equal payments or receipts that occur at evenly spaced intervals. Leases and rental payments are examples. The payments or receipts occur at the end of each period for an ordinary annuity while they occur at the beginning of each period for an annuity due.[3]

Present value of a perpetuity is an infinite and constant stream of identical cash flows.[4] Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.[5] Future value of an annuity (FVA) is the future value of a stream of payments (annuity), assuming the payments are invested at a given rate of interest.