PRESENTATION ON

FINANCIAL LEVERAGE

SUBMITTED BY :
GROUP NO
12
 Financial leverage

The use of the fixed charges, sources of

funds such as debt and preference capital along
with the owner’s equity in the capital structure is
known as financial leverage.
 Measures of financial leverage
 Debt ratio
L1  D D  E  D V

 Debt equity ratio

L2  D
E

 Interest coverage
L3  EBIT
int rest
 Financial leverage and the
shareholders return
Financial leverage depends on the following
terms:

 Earning per share (EPS)

 Return on equity (ROE)

 Plane plane
A B
EBIT 120000 120000
less interest 0 37500
PBT 120000 82500
less taxes 50% 60000 41250
PAT 60000 41250
total earning 60000 78750
no of share 50000 25000

EPS 1.2 1.65

16.50
ROE 12% %
 Type of leverages

Financial leverage
leverage

Operating leverage
 Degree of financial leverage

Financial leverage affects

 Profit after tax ,or

 the earning per share

DFL= %change in EPS /% change in EBIT

 Degree of combined leverage
 The degree of operating and financial
leverage can be combined to see the effect
of the total leverage on EPS associated with
a given change in sales.

 DCL = DFL * DOL

DCL  %changeinEBIT  %changeinEPS

%changeinsales %changeinEBIT
 Financial leverage and the
share holder risk

 EBIT causes EPS to fluctuate with in

wider range with debt in the capital
structure.
 The variability of EBIT and EPS
distinguish between two type of risk
 Operating risk
 Financial risk