financial leverage

DFL = operating income / (operating income - interest)

Degree of Fin. Lev = EBIT/EBT
= % change in net income / % change in operating income
= % change in EPS / % change in EBIT

walmart 112%
if the operating income increases by 1% then net income will increase by 1.12

combined leverage
DCL = OL*FL
OR DTL = DOL*DFL
= Contribution / EBT
= sales - variable cost / (sales - variable cost - fixed costs - interests)
= no. of units *(price per unit - variable cost per unit) / no. of units *(price per unit - variable cost)
= % change in net income / % change in revenue
=
s *(price per unit - variable cost) - fixed costs - interest
 sales 340,000 OL =
Less: variable costs 60000
contribution 280,000
Less: fixed cost 60,000 FL =
EBIT 220,000
Less: Interest 60,000
EBT 160,000 CL =
Less: Tax @ 50% 56000
EAT 104,000

Under Situation 1
Financial Plan A Financial Plan B
Sales 90000 90000
Less VC 45000 45000
Contri 45000 45000
Less FC 15000 20000
EBIT 30000 25000
A B
S1 EBIT 30000 30000
Less: Interest 2000 1000
EBT 28000 29000

FL UNDER S1 EBIT/EBT EBIT/EBT

1.07142857142857 1.03448275862069

S2 EBIT 25000 25000

Less: Interest 2000 1000
EBT 23000 24000

FL UNDER S2 EBIT/EBT EBIT/EBT

1.08695652173913 1.04166666666667

OL = Contri/EBIT

Actual Units Sold 3000

Sales Amt 90000
Variable Cost 45000
Operating Leverage Fin Plan A AND B S1 Fin. Plan A AND B S2
Contribution/EBIT Contribution/EBIT
1.5 1.8

Combined Leverage A B
S1 1.60714285714286 1.86206896551724
S2 2.023988005997 1.875
Contribution / EBIT Sales inc by 20% sales dec by 20%
1.27272727272727 sales 408000 272000
Less: variable costs 72000 48000
EBIT/EBT contribution 336000 224000
1.375 Less: fixed cost 60,000 60,000
EBIT 276,000 164,000
OL*FL Less: Interest 60,000 60,000
1.75 EBT 216,000 104,000
Less: Tax @ 50% 75600 36400
EAT 140,400 67,600

EPS = EAT/ No. of shares 1.755 0.845

q1 sales 2,400,000
Less: variable costs 1200000
contribution 1,200,000
Less: fixed cost 1,000,000
EBIT 200,000
Less: Interest 100,000
EBT 100,000
Less: Tax @ 45% 50000
EAT 50,000

a) DOL = contribution / EBIT 6

b) DFL = EBIT/EBT 2

c) DCL = OL*FL 12

d) retun on shareholders funds

EAT/shareholder's fund 5.00%

e) increse in sales by 600,000

DOL = %change in EBIT/% change in sales 6= EBIT/(6,00,000/24,00,000)
EBIT/0.25
1.5 % change in EBIT
change in EBIT = 300000

NEW EBIT = 500,000

 sales
Less: variable costs Operating
contribution leverage
Less: fixed cost
EBIT combined
Less: Interest leverage
EBT
Less: Tax @
EAT financial
Less: preference dividend (if any) leverage
net earning avaiable to every shareholder OR (PAT)

no. of equity shares (N)

earning per share (EPS) (PAT/N)
operating leverage
DOL = %change in EBIT/ %change in sales
(change in EBIT / Change in sales)* sales/EBIT
contribution/EBIT

DOL = Contribution / EBIT

contribution = EBIT + FIXED COST

DOL = (EBIT + fixed cost)/EBIT

DOL = Sales/ MOS (Margin of safety = sales - BE sales)

DOL = [Q(s-v)]/[Q(s-v)-f] Q= units of output

Q(S-V) = Contribution S= selling price per unit
Q(S-V)-F = EBIT V= variable cost per unit
F= total fixed cost

DOL = % change in operating income (EBIT)/% Change in revenue

([EBIT t1 - EBIT t0]/EBIT t0)/([revenue t1 - revenue t0]/ revenue t0)