CHIMC Presented By: Akhilesh Chawda LEVERAGE
What is Leverage?
 
 
TYPES OF LEVERAGE <ul><li>Operating Leverage- Affects a firm’s Business Risk. </li></ul><ul><li>Financial Leverage-Affects...
<ul><li>The variability or uncertainty of a firm’s operating income (EBIT).  Affected by: </li></ul><ul><li>Affected By:  ...
EBIT Operating Leverage
<ul><li>The variability or uncertainty of a firm’s earnings per share (EPS) and the increased probability of insolvency th...
EPS Financial Leverage
Indifference Point Quantity { Total  Revenue Total Cost = Fixed FC Break- even point } Q 1 + - EBIT
<ul><li>With high Operating leverage, an increase in sales produces a relatively larger increase in operating income. </li...
<ul><li>Sales </li></ul><ul><li>-  variable costs </li></ul><ul><li>-   fixed  costs  </li></ul><ul><li>operating income <...
<ul><li>Operating Leverage : By using fixed operating costs, a small change in sales   revenue is magnified into a larger ...
DOLs  =  % change in EBIT % change in sales change in EBIT EBIT change in sales sales = Degree of Operating Leverage from ...
<ul><li>If DOL=2, then a 1% 1%  increase in sales will result 2% in a increase in operating income (EBIT). </li></ul>What ...
<ul><li>Financial Leverage:  By using fixed cost financing, a small change in operating income is magnified into a larger ...
DFL  =  % change in  EPS % change in EBIT change in  EPS EPS change in EBIT EBIT = Degree of Financial Leverage
<ul><li>If DFL=3,  then a 1% increase in operating income will result in a 3% increase in earnings per share. </li></ul>Wh...
<ul><li>Combined Leverage:  By using  operating leverage  and  financial leverage , a small change in sales is magnified i...
DCL  =  DOL  x  DFL  % change in  EPS % change in Sales = change in  EPS EPS change in Sales Sales = Degree of Combined Le...
Leverage Sales EBIT EPS DOL DFL DCL
<ul><li>THANK YOU ………. </li></ul>
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Leverage n finance, gearing is borrowing money to supplement existing funds for investment in such a way that the potential positive or negative outcome is magnified and/or enhanced

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Leverage n finance, gearing is borrowing money to supplement existing funds for investment in such a way that the potential positive or negative outcome is magnified and/or enhanced

  1. 1. CHIMC Presented By: Akhilesh Chawda LEVERAGE
  2. 2. What is Leverage?
  3. 5. TYPES OF LEVERAGE <ul><li>Operating Leverage- Affects a firm’s Business Risk. </li></ul><ul><li>Financial Leverage-Affects a firm’s Financial Risk </li></ul><ul><li>Combined Leverage. </li></ul>
  4. 6. <ul><li>The variability or uncertainty of a firm’s operating income (EBIT). Affected by: </li></ul><ul><li>Affected By: </li></ul><ul><li>Sales volume variability, </li></ul><ul><li>Competition, </li></ul><ul><li>Cost variability, </li></ul><ul><li>Product diversification, </li></ul><ul><li>Product demand </li></ul><ul><li>Operating Leverage. </li></ul>Business Risk
  5. 7. EBIT Operating Leverage
  6. 8. <ul><li>The variability or uncertainty of a firm’s earnings per share (EPS) and the increased probability of insolvency that arises when a firm uses financial leverage </li></ul>Financial Risk
  7. 9. EPS Financial Leverage
  8. 10. Indifference Point Quantity { Total Revenue Total Cost = Fixed FC Break- even point } Q 1 + - EBIT
  9. 11. <ul><li>With high Operating leverage, an increase in sales produces a relatively larger increase in operating income. </li></ul>
  10. 12. <ul><li>Sales </li></ul><ul><li>- variable costs </li></ul><ul><li>- fixed costs </li></ul><ul><li>operating income </li></ul><ul><li>- interest </li></ul><ul><li>EBT </li></ul><ul><li>- taxes </li></ul><ul><li>Net Income </li></ul>} contribution margin EBT (1 - t) = Net Income, so, Net Income / (1 - t) = EBT Analytical Income Statement
  11. 13. <ul><li>Operating Leverage : By using fixed operating costs, a small change in sales revenue is magnified into a larger change in operating income. </li></ul><ul><li>This “multiplier effect” is called the degree of Operating Leverage. </li></ul>Degree of Operating Leverage (DOL)
  12. 14. DOLs = % change in EBIT % change in sales change in EBIT EBIT change in sales sales = Degree of Operating Leverage from Sales Level (S)
  13. 15. <ul><li>If DOL=2, then a 1% 1% increase in sales will result 2% in a increase in operating income (EBIT). </li></ul>What does this tell us? Stock- holders EBIT EPS Sales
  14. 16. <ul><li>Financial Leverage: By using fixed cost financing, a small change in operating income is magnified into a larger change in earnings per share. </li></ul><ul><li>This “multiplier effect” is called the degree of Financial Leverage. </li></ul>Degree of Financial Leverage (DFL)
  15. 17. DFL = % change in EPS % change in EBIT change in EPS EPS change in EBIT EBIT = Degree of Financial Leverage
  16. 18. <ul><li>If DFL=3, then a 1% increase in operating income will result in a 3% increase in earnings per share. </li></ul>What does this tell us? Stock- holders EBIT EPS Sales
  17. 19. <ul><li>Combined Leverage: By using operating leverage and financial leverage , a small change in sales is magnified into a larger change in earnings per share. </li></ul><ul><li>This “multiplier effect” is called degree of Combined Leverage. </li></ul>Degree of Combined Leverage (DCL)
  18. 20. DCL = DOL x DFL % change in EPS % change in Sales = change in EPS EPS change in Sales Sales = Degree of Combined Leverage
  19. 21. Leverage Sales EBIT EPS DOL DFL DCL
  20. 22. <ul><li>THANK YOU ………. </li></ul>

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