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ABFM MODULE - B
Chapter 8: Financial and Operating Leverages (PART-I)
What we will study?
*What is Leverage?
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INTRODUCTION:
We use a lever to enhance the impact or force to push or
move an object.

The simplest example of a lever is the see-saw which has a

long bar with a fulcrum and two children sit on the bar, one
on each side of the fulcrum.
A light-weight child can lift a heavier child on the other side if
his distance from the fulcrum is more than the distance of the
heavier child.
This property of lever prompted Galileo to say, "Give me a
point of support and I can lift the earth". Same principle is
applied in business.
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When you apply it to the operations, it is called operating
leverage and when you apply it to the finance functions, it
amounts to financial leverage.
Profitability Statement:
PARTICULARs ₹

Sales xxx
(-) Variable Cost (xx)
CONTRIBUTION xxx
(-) Fixed Cost (xx)
EARNING BEFORE INTEREST & TAX [EBIT] xxx
(-) Interest (xx)
EARNING BEFORE TAX [EBT] xxx
(-) Tax (xx)
EARNING AFTER TAX [EAT] xxx

EARNING PER SHARE [EPS] 𝐄𝐀𝐓

=𝑵𝒐 𝒐𝒇 𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒔
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Example 1: [EBIT 50% = EPS 50%]
Particulars Scenario 1 Scenario 2
EBIT 1,00,000 1,50,000
Tax@50% 50,000 75,000
PAT 50,000 75,000
No. of shares 10,000 10,000
EPS 5 7.5

Example 2: [EBIT 50% = EPS 62.5%]

Particulars Scenario 1 Scenario 2
EBIT 1,00,000 1,50,000
Interest 20,000 20,000
EBT 80,000 1,30,000
Tax @ 50% 40,000 65,000
PAT 40,000 65,000
No of shares 10,000 10,000
EPS 4 6.5