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  • Financial Leverage: Presented by Syed Wadud Shah

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    Financial leverage refers to a firm's use of fixed costs like loans and debentures to raise potential shareholder returns. High debt levels result in high financial leverage. The degree of financial leverage (DFL) measures the relationship between earnings before interest and taxes and profit before tax or earnings per share, where interest is the key factor. DFL is calculated as the percent change in EPS or PBT divided by the percent change in EBIT. A DFL greater than 1 is favorable, while less than 1 is unfavorable. While financial leverage can intensify returns, it also increases financial risk and the chance of insolvency.

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    FINANCIAL LEVERAGE DEGREE OF FINANCIAL LEVERAGE EXPLAINED

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    Financial Leverage

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    Financial leverage refers to a firm's use of fixed costs like loans and debentures to raise potential shareholder returns. High debt levels result in high financial leverage. The degree of financial leverage (DFL) measures the relationship between earnings before interest and taxes and profit before tax or earnings per share, where interest is the key factor. DFL is calculated as the percent change in EPS or PBT divided by the percent change in EBIT. A DFL greater than 1 is favorable, while less than 1 is unfavorable. While financial leverage can intensify returns, it also increases financial risk and the chance of insolvency.

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    10 views6 pages

    Financial Leverage: Presented by Syed Wadud Shah

    Uploaded by

    Wood Music
    Financial leverage refers to a firm's use of fixed costs like loans and debentures to raise potential shareholder returns. High debt levels result in high financial leverage. The degree of financial leverage (DFL) measures the relationship between earnings before interest and taxes and profit before tax or earnings per share, where interest is the key factor. DFL is calculated as the percent change in EPS or PBT divided by the percent change in EBIT. A DFL greater than 1 is favorable, while less than 1 is unfavorable. While financial leverage can intensify returns, it also increases financial risk and the chance of insolvency.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
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    of 6

    FINANCIAL LEVERAGE

    Presented by Syed Wadud Shah


    Financial leverage
    • A firm’s use of assets & liabilities using fixed costs in an attempt to rise potential
    returns to shareholders
    • Primary motive of using financial leverage is to increase returns on the fixed-charged
    funds such as loans, debentures etc instead of just using equity.
    Financial leverage & DFL
    • High debt = High financial Leverage
    • Relationship between Earning before interest & tax and profit before tax or EPS
    • “Interest” is key to this Relationship
    • Relationship is called “ Degree of Financial Leverage”
    • Denoted as DFL
    Degree of Financial Leverage *(calculation)
    •The
      percent change in firm’s earnings per share(EPS) or Profit before tax (PBT) divided
    by percent change in Earning Before interests and Taxes(EBIT)

    DFL =
    So,
    When; DFL = 1 ( neutral)
    DFL > 1 (favorable)
    DFL< 1 ( unfavorable)
    FINANCIAL RISK

    • Variability of EPS caused due to the use of financial leverage


    • If a firms wants to intensify their returns, they have to face risk for the purpose
    • Financial leverage increases the chance of Insolvency (liabilities > Assets)
    THANK YOU

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