LEVERAGES

MEANING
The employment of an asset or source of funds for
which the firm has to pay a fixed cost or fixed
return may be termed as Leverages.
TYPES OF LEVERAGES
Operating Leverages

Financial Leverages

Combined Leverages
OPERATING LEVERAGES
The leverage associated with investment activities is
referred to as operating leverage.

Operating leverage results from the existence of fixed

operating expenses in the firms income stream.

Operating leverage = C__

EBIT

Degree of operating leverage:

DOL= % change in EBIT
% change in Sales
FINANCIAL LEVERAGES
Leverage associated with financing activities is
called financial leverage.

A decision has to be made regarding the

composition of funds. The funds may be raised
through two sources, owners, called owners
equity, and outsiders, called creditors equity.

Financial leverage exists whenever a firm has

debts and other sources of funds that carry fixed
charges.
 Financial Leverage = EBIT
EBT

Degree of financial leverage:

DFL= %change in EPS_

% change in EBIT
COMBINED LEVERAGES
Composite leverage is calculated to determine the
combined effect of operating and financial
leverages.

CL=Financial Leverage x Operating Leverage

Degree of Combined leverage:

DCL= %change in EPS_

% change in Sales