Financial Leverage
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Formula DOL
(S - VC) / EBIT
Formula EBIT
= Revenue less Cost (variable and fixed)
Define Degree of Operating Leverage
A measure of leverage that states that a 1% increase in sales results in a 3% increase in EBIT
Formula DCL
DOL * DFL
Formula DFL
EBIT / (EBIT - I)
Net Income or EPS (Earning Per Share)
EBIT less I (interesest expense) Less T
If a firm's degree of financial leverage is 1.5, then a 1% decrease in EBIT will result in:
Net Income will decrease by 1.5%