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Leverage Analysis

This document discusses different types of leverage including operating leverage, financial leverage, and total leverage. It defines each type of leverage and provides formulas to calculate the degree of leverage. Operating leverage measures a firm's fixed operating costs and how they impact returns. Financial leverage measures how financing with debt impacts returns to shareholders. Total leverage combines the effects of operating and financial leverage. The document includes an example problem calculating the degrees of leverage given sales volumes and financial information for a sample company.

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Joshua Cabinas
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57 views6 pages

Leverage Analysis

This document discusses different types of leverage including operating leverage, financial leverage, and total leverage. It defines each type of leverage and provides formulas to calculate the degree of leverage. Operating leverage measures a firm's fixed operating costs and how they impact returns. Financial leverage measures how financing with debt impacts returns to shareholders. Total leverage combines the effects of operating and financial leverage. The document includes an example problem calculating the degrees of leverage given sales volumes and financial information for a sample company.

Uploaded by

Joshua Cabinas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Leverage Analysis

Leverage

The relative amount of the fixed


cost of capital, principally debt, in
a firm’s capital structure to
magnify returns to common
equity.
Business Risk &
Financial Risk

Analysis of
Leverage Operating
Leverage

Types of Leverage Financial leverage

Combined
Leverage
Profitability Statement

Operating Leverage

Total Leverage

Financial Leverage
Operatin
Financial Total
g
Leverage Leverage
Leverage
Types Measure of operating/business
risk that refers to the fixed
Measure of financial risk that refers to
financing a portion of the firm’s assets
bearing fixed financing charges in
Measure of total risk
determined by combining the

of
operating costs found in the firm’s hopes of increasing return to the effects of both the financial
income statement. common shareholders. and operating leverage.

Levera Higher fixed Costs = Higher


OL
The higher the financial
leverage, the higher the
financial risk, and the higher
A decrease in OL would cause
an increase in optimal

ge
amount of FL
the cost of capital

% ∆𝑖𝑛 𝐸𝐵𝐼𝑇 % ∆𝑖𝑛𝐸𝑃𝑆 % ∆𝑖𝑛 𝐸𝑃𝑆


DOL =  DFL  =  𝐷𝑇𝐿=
% ∆𝑖𝑛𝑆𝑎𝑙𝑒𝑠 % ∆𝑖𝑛 𝐸𝐵𝐼𝑇 % ∆𝑖𝑛 𝑆𝑎𝑙𝑒𝑠
𝐶𝑀 DFL  = 
𝐸𝐵𝐼𝑇
DOL  =  𝐸𝐵𝐼𝑇 −𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 −
𝑃𝐷
𝐸𝐵𝐼𝑇 1−𝑡
DTL = DOL X DFL
Dan Company sells a product for P1.00 each. The unit
variable cost is P0.80 while the fixed operating costs
amounted to P50,000. The company has current interest
charges of P6,000 and preferred dividends of P2,400. The
corporate tax rate is 40%.
a. Assuming that Dan sold 500,000 units for the year,
Sample compute:
1. Degree of Operating leverage (DOL)
Problem 2. Degree of Financial leverage (DFL)
3. Degree of total leverage (DTL)
b. Assuming that unit sales increased to 750,000 units,
compute:
1. DOL
2. DFL
3. DTL

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