Determination of Total

Leverage

-SAVINAYA PRASAD K
1PT10MBA44
 LEVERAGE
 In general sense, it means force applied at a
particular point to have a desired effect at
another point.
 In financial management, leverage means the

influence of one financial variable over some

other related financial variable.
 Types of Leverages
 Operating Leverage
 Financial Leverage
 Total Leverage.
 Total Leverage

 Total Leverage is also called as combined

leverage or composite leverage.

 It is the combination of operating leverage

and financial leverage.

 It expresses the effect of a change in sales

over change in the taxable profits of the
company.
Significance of Total Leverage

 It measures the total risk.

 It indicates the relationship b/w a change in sales & the

corresponding change in taxable profits.

 This leverage is useful to forecast the future sales level

and the resultant increase or decrease in taxable profit.
Calculation of Total Leverage:
 Sales xxxx
(-) Variable cost xxx
Contribution xxxx
(-) Fixed cost xxx
EBIT xxxx
(-) Interest xx
EBT xxxx
 Formulae:
 Total leverage = Operating Leverage X Financial Leverage

 Total Leverage = Contribution

EBT
Probems:
 A company has sales of Rs.1,00,000. The
variable costs are 40%of the sales while the
fixed operating costs amount to Rs30,000.
The amount of interest on long-term debt is
Rs.10,000.
 Calculate the composite Leverage &
illustrate its impact if sales increase by 5%.
QUERIES