Operating, Financial &

Combined Leverage

By: Ms. Manjari Sharma

Contents-
• Introduction
• Financial Decision
• Types of Leverage
• Operating Leverage
• Degree of Operating Leverage
• Financial leverage
• Degree of Financial Leverage
• Total / Combined Leverage
• Degree of Total /Combined Leverage
• Table- Income Statement
 Introduction-
Leverage- is taking the advantage of the Fixed
Expenses to increase the level of production or
any other activity, that is incurred either in the
form of Business Fixed Expenses like Rent, etc
and Financial Fixed Expenses like Interest.
Financial Decision-
Operating, Financial and Combined Leverage
are used as a tool for framing the Business
Decisions regarding the operating profit
attained in respect of different level of sales or
Firms Break even operating profit & Firms
Break even Sales.
Leverages helps in determining the total risk
i.e. business risk and financial risk.
 Types of Leverage
Operating Leverage
Financial Leverage
Combined Leverage
 Operating Leverage

 Usage of Fixed Operating Cost by the

Firm - to utilize the existing operating
cost
 Degree of Operating Leverage
The Degree of Operating Leverage is the
percentage change in the firms Operating
Profit/ EBIT resulting from a one percentage
change in the sales.
DOL = Percentage Change in EBIT
Percentage Change in Sales
 Interpretation of the DOL
• DOL is the sensitivity of the firm Operating
Profit to its level of Sales.
• The firm whose DOL is highest among all
firms it means the firm is having highest
sensitivity to the changes in the level of sales.
 Financial Leverage
• The use of Fixed Cost by the firm in the form
of Interest
 Degree of Financial Leverage
• The Percentage Change in a firms EPS
resulting from a one percentage change in the
level of Operating Profit.
DFL = Percentage Change in EPS
Percentage Change in EBIT
 Total Firm Risk
• Total firm risk is the mix of Business &
Financial risk.
Total Firm Risk= Business Risk +
Financial Risk
• It is the Variability in the Earning per Share.
EBIT is used to measure the Business Risk.
EPS is used to measure the Financial Risk.
 Degree of Total Leverage
• The percentage change in a firm’s EPS
resulting from a one percentage change in its
output/ sales.
DTL= Percentage Change in EPS
Percentage Change in Sales
 Table- Income Statement
Particulars Amount
Sales XXX
Less- Variable Expenses XXX
Contribution (C ) XXX
Less- Fixed Expenses XXX
Operating Profit/ EBIT XXX
Less- Interest XXX
Earning Before Tax (EBT) XXX
Less-Income Tax XXX
Earning After Tax (EAT) XXX
Number of Equity Shares XXX
Preference Dividend XXX
Earning Per Share = Earnings Available to Equity Shareholders or EAT- Pref., Dividend
Number of Equity Shares