The document discusses various measures of leverage, including: 1. Operating leverage, which measures how EBIT responds to changes in sales, calculated as the percentage change in EBIT divided by the percentage change in sales. 2. Financial leverage, which measures how earnings per share responds to changes in EBIT, calculated as the percentage change in EPS divided by the percentage change in EBIT. 3. Combined leverage, which measures how earnings per share responds to changes in sales by combining operating and financial leverage, calculated as the product of operating and financial leverage.

1. Abdul Salam, SE.,MM
Manajemen Keuangan
Pertemuan 10

2. Tujuan Pembelajaran
Mampu Menjelaskan dan memahami tentang :
1. Menghitung “cost of equity capital”
2. Menghitung “cost of debt”
3. Menghitung “overall cost of capital”
4. Kelemahan “overall cost of capital” dan bagaimana mengelolanya
5. Dampak “financial leverage” terhadap arus kas dan “cost of
equity”
6. Dampak beban pajak dan kebangkrutan terhadap pemilihan
struktur modal
7. Menghitung DFL, and DCL
8. Perusahaan yang risiko usahanya tinggi disarankan memilih
struktur keuangan yang DFL nya rendah

5. Operating Leverage
• Degree of Operating Leverage
• With FIXED operating costs, there will be
operating leverage
• DOL measures the sensitivity of EBIT to changes in sales. DOL
of a company is different at different levels of sales.
• High DOL implies that a relatively small change in
sales will result in large change in the operating
income (EBIT)

6. Operating Leverage
• Degree of Operating Leverage
– Operating Leverage is responsiveness of a firm’s
EBIT to fluctuations in Sales

7. Operating Leverage
• Degree of Operating Leverage
– Operating Leverage is responsiveness of a firm’s
EBIT to fluctuations in Sales
– Degree of Operating Leverage (DOL)
• Measurement of Operating Leverage
• For a unique level of sales, DOL changes as sales
change.

8. Operating Leverage
• Degree of Operating Leverage
– Operating Leverage is responsiveness of a firm’s
EBIT to fluctuations in Sales
– Degree of Operating Leverage (DOL)
• Measurement of Operating Leverage
• For a unique level of sales, DOL changes as sales
change.
DOLS = % Change in EBIT
% Change in Sales
Unique Level of Sales

9. Operating Leverage
• Measurement of DOL
– Calculation using per unit information:
DOLS =
Q(P – V)
Q(P – V) – F

10. Operating Leverage
• Measurement of DOL
– Calculation using per unit information:
DOLS =
Q(P – V)
Q(P – V) – F
Q = 3,750 units
Price = $800 per unit
Variable costs = $400 per unit
Fixed Costs = $1,000,000 per year.
Example:

11. Operating Leverage
• Measurement of DOL
– Calculation using per unit information:
DOLS = Q(P – V)
Q(P – V) – F
Q = 3,750 units
Price = $800 per unit
Variable costs = $400 per unit
Fixed Costs = $1,000,000 per year.
Example:
DOL3,750 units =
3,750(800 – 400)
3,750(800 – 400) – 1,000,000

12. Operating Leverage
• Measurement of DOL
– Calculation using per unit information:
DOLS = Q(P – V)
Q(P – V) – F
Q = 3,750 units
Price = $800 per unit
Variable costs = $400 per unit
Fixed Costs = $1,000,000 per year.
Example:
DOL3,750 units =
3,750(800 – 400)
3,750(800 – 400) – 1,000,000
= 3 times

13. Operating Leverage
• Measurement of DOL
– Calculation using per unit information:
DOLS =
Q(P – V)
Q(P – V) – F
Q = 3,750 units
Price = $800 per unit
Variable costs = $400 per unit
Fixed Costs = $1,000,000 per year.
Example:
DOL3,750 units =
3,750(800 – 400)
3,750(800 – 400) – 1,000,000
= 3 times Interpretation: If sales change 1%, then EBIT
will change 3% in the same direction.

14. Operating Leverage
• Measurement of DOL
– Calculation using Income Statement Information
DOLS =
S – VC
S – VC – F

15. Operating Leverage
• Measurement of DOL
– Calculation using Income Statement Information
DOLS =
S – VC
S – VC – F
Q = 3,750 units
Price = $800 per unit
Variable costs = $400 per unit
Fixed Costs = $1,000,000 per year.
Example:

16. Operating Leverage
• Measurement of DOL
– Calculation using Income Statement Information
DOLS =
S – VC
S – VC – F
Q = 3,750 units
Price = $800 per unit
Variable costs = $400 per unit
Fixed Costs = $1,000,000 per year.
Example:
Sales
$3,000,000
x

17. Operating Leverage
• Measurement of DOL
– Calculation using Income Statement Information
DOLS =
S – VC
S – VC – F
Q = 3,750 units
Price = $800 per unit
Variable costs = $400 per unit
Fixed Costs = $1,000,000 per year.
Example:
Variable Costs
$1,500,000
x

18. Operating Leverage
• Measurement of DOL
– Calculation using Income Statement Information
DOLS =
S – VC
S – VC – F
Q = 3,750 units
Price = $800 per unit
Variable costs = $400 per unit
Fixed Costs = $1,000,000 per year.
Example:
DOL3,750 units =
3,000,000 – 1,500,00
3,000,000 – 1,500,000 – 1,000,000

19. Operating Leverage
• Measurement of DOL
– Calculation using Income Statement Information
DOLS =
S – VC
S – VC – F
Q = 3,750 units
Price = $800 per unit
Variable costs = $400 per unit
Fixed Costs = $1,000,000 per year.
Example:
DOL3,750 units =
3,000,000 – 1,500,00
3,000,000 – 1,500,000 – 1,000,000
= 3 times

20. Operating Leverage
• Measurement of DOL
– Calculation using Income Statement Information
DOLS =
S – VC
S – VC – F
Q = 3,750 units
Price = $800 per unit
Variable costs = $400 per unit
Fixed Costs = $1,000,000 per year.
Example:
DOL3,750 units =
3,000,000 – 1,500,00
3,000,000 – 1,500,000 – 1,000,000
= 3 times Same Answer as before

21. Operating Leverage
• Degree of Operating Leverage
– Degree of Operating Leverage is highest when the
firm is closest to break-even point--DOL falls as
sales rise
Quantity DOL
2,500 (QB) Undefined
3,250 4.33
3,750 3
5,000 2

22. Operating Leverage
• Degree of Operating Leverage
– Degree of Operating Leverage is highest when the
firm is closest to break-even point--DOL falls as
sales rise
Quantity DOL
2,500 (QB) Undefined
3,250 4.33
3,750 3
5,000 2
The higher the sales level above break-even, the less EBIT (in
%) changes as sales change

23. Operating Leverage
• Degree of Operating Leverage
– Degree of Operating Leverage is highest when the
firm is closest to break-even point--DOL falls as
sales rise
Quantity DOL
2,500 (QB) Undefined
3,250 4.33
3,750 3
5,000 2
The higher the sales level above break-even, the less EBIT(in
%) changes as sales change
If Fixed Costs = $0, Degree of Operating Leverage = 1

24. Financial Leverage
• Degree of Financial Leverage
– Finance a portion of the firm’s assets with
securities that have fixed financial costs
• Debt
• Preferred Stock

25. Financial Leverage
• Degree of Financial Leverage
– Finance a portion of the firm’s assets with
securities that have fixed financial costs
• Debt
• Preferred Stock
– Financial Leverage measures changes in earnings
per share (NI) as EBIT changes.

26. Financial Leverage
• Degree of Financial Leverage
– Finance a portion of the firm’s assets with securities that have fixed
financial costs
• Debt
• Preferred Stock
– Financial Leverage measures changes in earnings per share as EBIT
changes.
– Degree of Financial Leverage (DFL) at one level of EBIT:
DFLEBIT =
% Change in EPS
% Change in EBIT
Unique Level of EBIT

27. Financial Leverage
DFLEBIT =
EBIT
EBIT – I
• Measurement of DFL

28. Financial Leverage
DFLEBIT =
EBIT
EBIT – I
• Measurement of DFL
Total Fixed
Financing
Costs

29. Financial Leverage
DFLEBIT =
EBIT
EBIT – I
EBIT = $500,000
Interest Charges = $200,000
Example:
• Measurement of DFL

30. Financial Leverage
DFLEBIT =
EBIT
EBIT – I
EBIT = $500,000
Interest Charges = $200,000
Example:
DFLEBIT=500,000 =
500,000
500,000 – 200,000
• Measurement of DFL

31. Financial Leverage
DFLEBIT =
EBIT
EBIT – I
EBIT = $500,000
Interest Charges = $200,000
Example:
DFLEBIT=500,000 =
500,000
500,000 – 200,000
= 1.67 times
• Measurement of DFL

32. Financial Leverage
DFLEBIT =
EBIT
EBIT – I
EBIT = $500,000
Interest Charges = $200,000
Example:
DFLEBIT=500,000 =
500,000
500,000 – 200,000
= 1.67 times
• Measurement of DFL
Interpretation: For 1% change in EBIT (from an existing level of
$500,000) Earnings Per Share will change 1.67%

33. DFL
S - VC - F
• DFL = ---------------------
S - VC - F - I

34. Combined Leverage
• Degree of Combined Leverage
– Measures changes in Earnings Per Share given changes
in Sales

35. Combined Leverage
• Degree of Combined Leverage
– Measures changes in Earnings Per Share given changes
in Sales
– Combines both Operating and Financial Leverage

36. Combined Leverage
• Degree of Combined Leverage
– Measures changes in Earnings Per Share given changes in
Sales
– Combines both Operating and Financial Leverage
– Computed for a specific level of sales

37. Combined Leverage
DCLS =
% Change in EPS
% Change in Sales
• Degree of Combined Leverage
– Measures changes in Earnings Per Share given changes in
Sales
– Combines both Operating and Financial Leverage
– Computed for a specific level of sales
Unique Level of Sales

38. Combined Leverage
DCLS = DOLS x DFLEBIT
• Measurement of DCL

39. Combined Leverage
DCLS = DOLS x DFLEBIT
DFLEBIT = 1.67
DOLS = 3.0
Example:
• Measurement of DCL

40. Combined Leverage
DCLS = DOLS x DFLEBIT
DFLEBIT = 1.67
DOLS = 3.0
Example:
• Measurement of DCL
DCL3,750 = 3.0 x 1.67

41. Combined Leverage
DCLS = DOLS x DFLEBIT
DFLEBIT = 1.67
DOLS = 3.0
Example:
= 5.0 times
• Measurement of DCL
DCL3,750 = 3.0 x 1.67

42. Combined Leverage
DCLS = DOLS x DFLEBIT
DFLEBIT = 1.67
DOLS = 3.0
Example:
= 5.0 times
• Measurement of DCL
Interpretation: When sales change 1%, Earnings Per Share (NI) will
change 5.0%
DCL3,750 = 3.0 x 1.67

43. Combined Leverage
DCLS =
• Measurement of DCL--Alternative Computation
Q(P – V)
Q(P – V) – F – I

44. Combined Leverage
DCLS =
• Measurement of DCL--Alternative Computation
Q(P – V)
Q(P – V) – F – I
Q = 3,750 units
Price = $800 per unit
Variable costs = $400 per unit
Fixed Costs = $1,000,000 per year
Interest = $200,000 per year
Example:

45. Combined Leverage
DCLS =
• Measurement of DCL--Alternative Computation
Q(P – V)
Q(P – V) – F – I
Q = 3,750 units
Price = $800 per unit
Variable costs = $400 per unit
Fixed Costs = $1,000,000 per year
Interest = $200,000 per year
Example:
DCLS =
3,750(800 – 400)
3,750(800 – 400) – 1,000,000 – 200,000

46. Combined Leverage
DCLS =
• Measurement of DCL--Alternative Computation
Q(P – V)
Q(P – V) – F – I
Q = 3,750 units
Price = $800 per unit
Variable costs = $400 per unit
Fixed Costs = $1,000,000 per year
Interest = $200,000 per year
Example:
DCLS =
3,750(800 – 400)
3,750(800 – 400) – 1,000,000 – 200,000
= 5 times

47. Combined Leverage
DCLS =
• Measurement of DCL--Alternative Computation
Interpretation: When sales change 1%, Earnings Per Share will
change 5.0%
Q(P – V)
Q(P – V) – F – I
Q = 3,750 units
Price = $800 per unit
Variable costs = $400 per unit
Fixed Costs = $1,000,000 per year
Interest = $200,000 per year
Example:
DCLS =
3,750(800 – 400)
3,750(800 – 400) – 1,000,000 – 200,000
= 5 times

48. S - VC - F
DCLS = ---------------------
S - VC - F - I
Combined Leverage
Measurement of DCL--Alternative Computation-
Using income statement.