Operating, Financial & Combined Leverage

8/7/2019 Operating, Financial & Combined Leverage

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Operating, Financial &

Combined Leverage

By: Ms. Manjari Sharma



Contents-

• Introduction

• Financial Decision

• Types of Leverage

• Operating Leverage

• Degree of Operating Leverage

• Financial leverage

• Degree of Financial Leverage

•

Total / Combined Leverage• Degree of Total /Combined Leverage

• Table- Income Statement



Introduction-

Leverage- is taking the advantage of the Fixed

Expenses to increase the level of production or

any other activity, that is incurred either in the

form of Business Fixed Expenses like Rent, etc

and Financial Fixed Expenses like Interest.



Financial Decision-

Operating, Financial and Combined Leverage

are used as a tool for framing the Business

Decisions regarding the operating profit

attained in respect of different level of sales or

Firms Break even operating profit & Firms

Break even Sales.

Leverages helps in determining the total risk i.e. business risk and financial risk.



Types of Leverage

Operating Leverage

Financial Leverage

Combined Leverage



Operating Leverage

Usage of Fixed Operating Cost by the

Firm - to utilize the existing operating

cost



Degree of Operating Leverage

The Degree of Operating Leverage is the

percentage change in the firms Operating

Profit/ EBIT resulting from a one percentage

change in the sales.

DOL = Percentage Change in EBIT

Percentage Change in Sales



Interpretation of the DOL

• DOL is the sensitivity of the firm Operating

Profit to its level of Sales.

• The firm whose DOL is highest among all

firms it means the firm is having highest

sensitivity to the changes in the level of sales.



Financial Leverage

• The use of Fixed Cost by the firm in the form

of Interest



Degree of Financial Leverage

• The Percentage Change in a firms EPS

resulting from a one percentage change in the

level of Operating Profit.

DFL = Percentage Change in EPS

Percentage Change in EBIT



Total Firm Risk

• Total firm risk is the mix of Business &

Financial risk.

Total Firm Risk= Business Risk +

Financial Risk

• It is the Variability in the Earning per Share.

EBIT is used to measure the Business Risk.EPS is used to measure the Financial Risk.



Degree of Total Leverage

• The percentage change in a firm’s EPS

resulting from a one percentage change in its

output/ sales.

DTL= Percentage Change in EPS

Percentage Change in Sales



Table- Income Statement

Particulars Amount

Sales XXX

Less- Variable Expenses XXX

Contribution (C ) XXX

Less- Fixed Expenses XXX

Operating Profit/ EBIT XXX

Less- Interest XXX

Earning Before Tax (EBT) XXX

Less-Income Tax XXXEarning After Tax (EAT) XXX

Number of Equity Shares XXX

Preference Dividend XXX

Earning Per Share = Earnings Available to Equity Shareholders or EAT- Pref., Dividend

Number of Equity Shares

Operating, Financial & Combined Leverage

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