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Leverage(3)

Leverage(3)

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Published by Surender Singh

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Published by: Surender Singh on Nov 21, 2010
Copyright:Attribution Non-commercial

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11/01/2012

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-1
LeverageLeverage
Operating, FinancialOperating, Financialand combinedand combinedLeverageLeverageOperating, FinancialOperating, Financialand combinedand combinedLeverageLeverage
 
-2
LeverageLeverage
Leverage is used to describe the ability of a firmemploying long term funds having a fixed cost toenhance the return to its owners.“ The employment of an asset or sources of fundswhich the firm has to pay a fixed cost or return”C. VanhorneThe presence of fixed cost has considerable influenceon the earnings available to equity shareholderswhen the volume of output or sales is increased.
 
-3
Operating LeverageOperating Leverage
x
It occurs when in a firm with fixed costs, the percentagechange in operating profits is greater than the percentagechange in sales
x
Computation:
Operating leverage = Contribution/operating profitContribution = sales – variable costOperating profit = sales – variable cost – fixed cost (EBIT)
It can be defined as the tendency of operating profitIt can be defined as the tendency of operating profitto change disproportionately with the volume of to change disproportionately with the volume of sale.sale.

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