2. What is Leverage?

3. What is Leverage?

4. What is Leverage?

15. EBIT Operating Leverage

21. EPS Financial Leverage

23. Breakeven Analysis Quantity $

24. Quantity $ Total Revenue

26. Quantity $ Total Revenue

27. Quantity { $ Total Revenue Total Cost FC

28. Quantity { $ Total Revenue Total Cost FC Q 1 + - } EBIT

29. Quantity { $ Total Revenue Total Cost FC Break-even point Q 1 + - } EBIT

31. Quantity { $ Total Revenue Total Cost FC Break- even point Q 1 + - } EBIT

32. Quantity { $ Total Revenue Total Cost = Fixed FC Break-even point } Q 1 + - EBIT

34. Quantity { $ Total Revenue Total Cost = Fixed FC Break- even point } Q 1 + - EBIT

35. Trade-off: the firm has a higher breakeven point. If sales are not high enough, the firm will not meet its fixed expenses! Quantity { $ Total Revenue Total Cost = Fixed FC Break- even point } Q 1 + - EBIT

36. Breakeven Calculations

43. Degree of Operating Leverage from Sales Level (S) DOLs = % change in EBIT % change in sales

44. Degree of Operating Leverage from Sales Level (S) DOLs = % change in EBIT % change in sales change in EBIT EBIT change in sales sales =

52. Degree of Financial Leverage DFL = % change in EPS % change in EBIT

53. Degree of Financial Leverage DFL = % change in EPS % change in EBIT change in EPS EPS change in EBIT EBIT =

60. Degree of Combined Leverage

61. Degree of Combined Leverage DCL = DOL x DFL

62. Degree of Combined Leverage DCL = DOL x DFL % change in EPS % change in Sales =

63. Degree of Combined Leverage DCL = DOL x DFL = % change in EPS % change in Sales change in EPS EPS change in Sales Sales =

72. Levered Company EPS Financial leverage Operating Income Sales Operating leverage

73. Degree of Operating Leverage from Sales Level (S) DOLs = Sales - Variable Costs EBIT

74. Degree of Operating Leverage from Sales Level (S) 1,400,000 - 800,000 350,000 = DOLs = Sales - Variable Costs EBIT

75. Degree of Operating Leverage from Sales Level (S) 1,400,000 - 800,000 350,000 = 1.714 = DOLs = Sales - Variable Costs EBIT

76. Levered Company EPS Operating Income Sales

77. Levered Company EPS Operating Income Sales Operating leverage

78. Levered Company EPS Operating Income Sales Operating leverage 10%

79. Levered Company EPS Operating Income Sales Operating leverage 10% 17.14%

80. Degree of Financial Leverage DFL = EBIT EBIT - I

81. Degree of Financial Leverage DFL = EBIT EBIT - I = 350,000 225,000

82. Degree of Financial Leverage DFL = EBIT EBIT - I = 350,000 225,000 = 1.556

83. Levered Company EPS Operating Income Sales

84. Levered Company EPS Operating Income Sales Financial leverage

85. Levered Company EPS Financial leverage Operating Income Sales 10%

86. Levered Company EPS Financial leverage Operating Income Sales 10% 15.56%

87. Levered Company EPS Financial leverage Operating Income Sales 10% 15.56%

88. Degree of Combined Leverage DCL = Sales - Variable Costs EBIT - I

89. Degree of Combined Leverage DCL = Sales - Variable Costs EBIT - I 1,400,000 - 800,000 225,000 =

90. Degree of Combined Leverage DCL = Sales - Variable Costs EBIT - I 1,400,000 - 800,000 225,000 = 2.667 =

91. Levered Company EPS Operating Income Sales

92. Levered Company EPS Operating Income Sales Operating leverage

93. Levered Company EPS Financial leverage Operating Income Sales Operating leverage

94. Levered Company EPS Financial leverage Operating Income Sales Operating leverage 10%

95. Levered Company EPS Financial leverage Operating Income Sales Operating leverage 10% 26.67%

96. Levered Company EPS Financial leverage Operating Income Sales 10% 26.67% Operating leverage