FINANCIAL LEVERAGE

UDKI ANNARAJ. R
ROLL NO :27
INTRODUCTION
 A firm needs funds to run and manage its activities.The
funds are important need to set up an enterprise and then
to implement expansion, diversification and other plans.
 The funds may be arranged through two resources.,
 Owners equity
 Creditors equity
FL
 The use of the fixed financing costs by the firm leads to
the financial leverage
 “This exists whenever a firm has debts and other source of
funds that carry fixed changes”

 Financial leverage is acquired by choice.

 Used as a means of increasing the return to common
shareholders.
Computation of (FL)
 Where capital structure consists of equity shares and debts

Financial leverage = EBIT

PBT
 Where the capital structure consists of equity shares,
preference shares and debts

FL = EBIT
EBIT-I-(PD/1-t)
EBIT =Earnings before interest and taxes
I = Interest
PD = prefferred dividends
T = corporate tax rate
Degree of (FL)
 The percentage change in a firms earnings per share (EPS)
resulting in percentage change in operating profit.

 DFL = %change in (EPS)

%change in (EBIT)
Importance of FL
 Capital structure management.
 Maximization of EPS and market vale of shares
 Measurement of risk.