Financial and Operation Leverage Analysis.pptx

Leverage Analysis

1. Financial Management Leverage

2. Contribution = EBIT + Fixed cost Contribution = Sales – Variable Cost

3. where Q is the units of output, s is the unit selling price , v is the unit variable cost and F is the total fixed costs .

4. Brightways Ltd the management had developed the following income statement based on an expected sales volume of 100,000 units : Calculate DOL

5. The degree of financial leverage (DFL) is defined as the percentage change in EPS due to a given percentage change in EBIT:

6. The numerator is earnings before interest and taxes and the denominator is profit before taxes. EBIT = Q ( s – v ) – F ; PBT = EBIT – INT where Q is the units of output, s is the unit selling price , v is the unit variable cost and F is the total fixed costs .

7. Example In the case of Brightways Ltd, when EBIT increases from Rs 120,000 to Rs 160,000 , EPS increases from Rs 1.65 to Rs 2.45. Calculate DFL ?

8. (Note: Interest on Debt = 15%)

9. Combining Financial and Operating Leverages The degree of combined leverage (DCL) is given by the following equation: Another way of expressing the degree of combined leverage is as follows: Since [ Q ( s – v )] is C ontribution and [ Q ( s – v ) – F – INT] is the profit after interest but before taxes ,

10. Example Brightways Ltd the management had developed the following income statement based on an expected sales volume of 100,000 units. W hen it used less automated production processes, the combined leverage effect at a sales of Rs 8 lakh (100,000 units at Rs 8 ) with interest payment of Rs 37,500 :Calculate DCL

11. Numericals

12. Note : Variable cost is 70% of Sales Revenue for both the firms

13. - 50,000