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BRILLIANT’S Leverage Analysis 383

Q.42. Explain the combined effect of operating and financial leverages.
Am°naoqQ>J VWm ’$m¶Z|{e¶b brdaoO H$m g§¶wº$ n«^md g‘PmB¶o&
OR
Write a short note on Degree of combined leverage (DCL).
H§$~mB§S> brdaoO H$s {S>J«r (DCL) na g§{já {Q>ßnUr {b{IE&
OR
Explain the significance of combined/Total leverage.
H§$~mB§S>/Q>moQ>b brdaoO H$m ‘hÎd g‘PmB¶o&

Combined effect of Operating and Fi- Am°naoqQ>J brdaoO Ed§ \$m`ZopÝe`c brdaoO H$m
nancial Leverages g§`wº$ à^md

Operating and Financial Leverages to- Am°naoqQ>J brdaoO Ed§ \$m`ZopÝe`c brdaoO H$mo g§`wº$
gether cause wide fluctuation in EPS for a given ê$n go XoIZo na {dH«$` _| n[adV©Z H$m à{V eo`a Am` _|
change in sales. If a company employs high hmoZo dmbo n[adV©Z H$m AZw_mZ bJm`m Om gH$Vm h¡Ÿ& `{X
level of operating and financial leverages, even H$ånZr H$m Am°naoqQ>J brdaoO Ed§ \$m`ZopÝe`c brdaoO
a small change in the level of sales will have H$m ñVa D±$Mm h¡ Vmo {dH«$` _| Wmoo‹S>m n[adV©Z, à{V eo`a
dramatic effect on EPS. Am` _| H$B© JwZm n[adV©Z bm gH$Vm h¡Ÿ&
The degrees of operating and financial Am°naoqQ>J brdaoO Ed§ \$m`ZopÝe`c brdaoO H$s
leverages can be combined to see the effect of ghm`Vm go H§$~mBÝS> brdaoO kmV {H$`m Om gH$Vm h¡Ÿ&
total leverages on EPS associated with a given
change in sales. The degree of combined leverage Bggo EPS na Hw$c crdaoO H$m à^md nVm cJVm h¡Ÿ&
(DCL) is given by the following equation: H§$~mBÝS> brdaoO H$m gyÌ {ZåZ h¡Ÿ…

DCL = DOL × DFL
or

Contribution EBIT
DCL = 
EBIT (EBIT I)

Contribution

(EBIT I)

% Change in EBIT % Change in EPS % Change in EPS
=  =
% Change in Sales % Change in EBIT % Change in Sales
Firm can employ operating and financial \$_©, Am°naoqQ>J brdaoO Ed§ \$m`ZopÝe`c brdaoO Ho$
leverage in various combinations. It can either {d{^Þ H$m°på~ZoeÝg ~Zm gH$Vr h¡& dh `m Vmo CÀM Am°Q>mo_oQ>oS>
choose high automated production process and àmoS>ŠeZ àmogog VWm CÀM Am°naoqQ>J crdaoO ñVa `m
high degree of operating leverages or low au-
{ZåZ Am°Q>mo_oQ>oS> àmoS>ŠeZ àmogog VWm {ZåZ Am°naoqQ>J crdaoO
tomated production process and low degree of
operating leverage. ñVa MwZ gH$Vr h¡Ÿ&