Leverage, Definition, Types of leverage, Degree of leverage

1. PRESTIGE INSTITUTE OF
MANAGEMENT GWALIOR
PRESENTED BY:
DEEPANSHU GOYAL
DEVENDRA SINGH RATHORE
MEGHNA SHARMA

2. LEVERAGE

3. INTRODUCTION
LEVERAGE refers to the ability of a firm in employing long term
funds having a fixed cost to enhance returns to the owners.
• LEVERAGE is the amount of debt
used to finance a firm's assets.
A firm with significantly more debt than equity is considered to
be highly LEVERAGED & with no debt is said to be
UNLEVERAGED.

4. TYPES OF LEVERAGE
Operating Leverage
Financial Leverage
Combined Leverage

5. OPERATING LEVERAGE
Operating leverage may be defined as the employment of an assets
with the fixed cost in the hope that sufficient revenue will be
generated to cover all the fixed and variable costs.
The use of assets for which a company pays a fixed cost is called
operating leverage.

6. OL =
𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏
𝑬𝑩𝑰𝑻
CONT.
DEGREE OF OPERATING LEVERAGE
=
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑛𝑒𝑡 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑜𝑢𝑡𝑝𝑢𝑡

7. FINANCIAL LEVERAGE
Financial leverage is defined as “the use of funds with a
fixed cost in order to increase earning per share”. It is
the use of companies funds on which it pays a limited
return.

8. CONT.
FL =
𝑬𝑩𝑰𝑻
𝑬𝑩𝑰𝑻 −𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕
DEGREE OF FINANCIAL LEVERAGE
=
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑒𝑎𝑟𝑛𝑖𝑛𝑔 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝐸𝑃𝑆)
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 & 𝑡𝑎𝑥 (𝐸𝐵𝐼𝑇)

9. COMBINED LEVERAGE
Combined leverage defined as the potential use of
fixed costs, both operating and financial, which
magnifies the effects of sales volume change on
the earning per share of the firm.

10. DEGREE OF COMBINED LEVERAGE
= Degree of Operating leverage
X
Degree of Financial Leverage