Operating and Financial Leverages

Contents
• Introduction to concept of leverage
• Operating leverage, its usefulness as a tool in decision making on scale of operations
• Financial leverage – advantage of debt in preference to equity, its usefulness to increase Earning Per Share (EPS) for shareholder
• Total leverage – combination of operating and financial leverages
• Attendant risks in increasing leverage, both operating and financial
• Numerical exercises in operating, financial and total leverages

At the end of the chapter the student will be able to
• Measure operating leverage at any given level of output, the output being production or sales and determine the impact on EBIT
• Measure financial leverage at any given level of EBIT and determine the impact on EPS
• Measure total leverage at any given level of output and determine the impact on EPS for any given level of output
• Use both the leverages as tools in financial decision relating to scale of production/output as well as how much to borrow in a given capital structure

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