degree of total leverage Accounting presentation

Accounting Degree of total leverage

1. DEGREE OF
TOTAL LEVERAGE

2. CONTENTS
Meaning of Leverage
Types of Leverage
Operating Leverage
Financial Leverage
Difference between Operating
& Financial Leverage
Degree of Total Leverage

3. LEVERAGE
Leverage means the employment of
assets or funds for which the firm
pays a fixed cost or fixed return.
▪ The concept that is used to study
the effects of various mix of debt and
equity on the shareholder’s return
and risk in the capital structure of a
firm is called leverage.

4. TYPES OF LEVERAGE
Operating
Leverage
Financial
Leverage
Degree of
total leverage

5. meaning of
operating leverage
Operating leverage is defined as the use of
fixed operating costs to magnify a change
in profits relative to a given changes in
sales.
Operating Leverage = �����??????���??????�� or
�����??????���??????�� ������??????�� ����??????�� ??????�????????????
EBIT = Earning before Interest & Tax
*Contribution = Sales-Variable cost

6. degree of
operating leverage
The multiplier effect resulting from the
use of fixed operating costs can be
measured by the degree of operating
leverage.
The degree of operating leverage (DOL)
at any level of output expressed as the
ratio of the percentage change in
operating profits to percentage change
in sales.
DOL = %∆??????�����??????�� or %∆??????�??????????????????� %∆??????��????????????��
%∆??????��????????????��

7. characteristics of operating leverage
It is related to the assets side
of balance sheet.
It is directly related to break-
even point.
It is involves business risk.
It is related to selling price
and variable costs.

8. The firms ability to use fixed financial
charges/costs to magnify the effect of changes
in earnings before interest & tax (EBIT) on firm’s
earning per share.
▪ It sometimes treated as “Trading on Equity”.
Financial Leverage = ???????????????????????? or ????????????????????????
*EBIT = Earning before Interest & Tax *EBT =
Earning before tax
*PD = Preference dividend
*t= Tax rate
meaning DOFL
Financial Leverage
The DFL can be measured in any of
two ways:-
1. DFL = 2. DFL =
%∆????????????????????????� %∆??????????????????????????????�
%∆????????????????????????� %∆??????????????????????????????�

9. characteristics of financial leverage
It is related to liabilities side of
balance sheet
It is the mix of methods of
financing
It is involves financial risk
It shows effect of changes in
operating profits on earnings
per share due to fixed
financial charges

10. Magnifies the effect of changes in sales
volume on operating profit.
Establishes relationship b/w EBIT &
Sales.
Measures a firm's ability to use fixed cost
assets to magnify the operating profits.
Concerned with investment decision.
Involves the operating risk of being unable to
cover fixed operating costs.
Assets side of balance sheet.
OL FL
Difference between Operating
& Financial Leverage
Magnifies the effect of changes in
EBIT on EPS.
Establishes relationship b/w EBIT &
EPS.
Measures a firm's ability to use fixed cost funds to
magnify the return to equity shareholders.
Concerned with financing or capital structure decision.
Involves the financial risk being unable to cover fixed
financial cost.
Liabilities side f balance sheet.

11. total leverage
Definition of Total Leverage: Total leverage refers
to the combined effect of both operating and
financial leverage on a company's earnings before
interest and taxes (EBIT).
Introduction to Total Leverage: The interaction of
operating and financial leverage.
Formula: Total Leverage = Operating Leverage *
Financial Leverage
Example: Demonstrating the combined effect on
earnings.

12. degree of total leverage
The Degree of Total Leverage (DTL) is a financial metric that represents the
combined effect of operating leverage and financial leverage on a
company's earnings before interest and taxes (EBIT). It measures the
sensitivity of a company's EBIT to changes in sales. The formula for
calculating DTL is:
DTL= %ΔEBIT / %ΔSales Here,
%ΔEBIT is the percentage change in EBIT.
%ΔSales is the percentage change in sales.
A higher DTL indicates a greater impact on EBIT due to changes in sales,
reflecting higher leverage and potentially higher risk. DTL is crucial for
assessing a company's financial structure, risk, and break-even points in
different scenarios.

13. Thank you
very much!