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Ch 5

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Gaurav Muliya
Gaurav Muliya
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Financing Decision
In this chapter… ,[object Object],[object Object],[object Object]
Sources of Finance… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Leverage… ,[object Object],[object Object],[object Object]
Types of Leverage… ,[object Object],[object Object]
Operating Leverage… ,[object Object],[object Object]
Symbolically… When the data is given only for one year, then we have to compute operating leverage, by the following formula. Percentage change in Sales Or Percentage change in EBIT = Degree of Operating Leverage (DOL) Operating Profit (EBIT) Contribution = Operating Leverage
Application of the Operating Leverage… ,[object Object],[object Object]
Financial Leverage… ,[object Object],Percentage change in EPS Percentage change in EBIT = Degree of Financial Leverage (DFL)   EBT (Taxable income)     Or EBIT (Operating profit) = Financial Leverage  
Application of the Financial Leverage… ,[object Object],[object Object]
Combined Leverage… ,[object Object],Or % Change in Sales % Change in EBIT % Change in Sales % Change in EPS = % Change in EPS X % Change in EBIT EBT EBT EBIT Contribution = EBIT X Contribution
Effect of Leverage… This combination is an ideal situation. The company can follow aggressive debt policy. High Low This combination have adverse effects of operating leverage were taken care of by having low financial leverage. Low High This combination is very cautious policy and not assuming risk. Low Low This combination is very dangerous policy, which should be avoided. High High Combined Effect Financial Leverage Operating Leverage

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Ch 5

  • 2.
  • 3.
  • 4.
  • 5.
  • 6.
  • 7. Symbolically… When the data is given only for one year, then we have to compute operating leverage, by the following formula. Percentage change in Sales Or Percentage change in EBIT = Degree of Operating Leverage (DOL) Operating Profit (EBIT) Contribution = Operating Leverage
  • 8.
  • 9.
  • 10.
  • 11.
  • 12. Effect of Leverage… This combination is an ideal situation. The company can follow aggressive debt policy. High Low This combination have adverse effects of operating leverage were taken care of by having low financial leverage. Low High This combination is very cautious policy and not assuming risk. Low Low This combination is very dangerous policy, which should be avoided. High High Combined Effect Financial Leverage Operating Leverage