Page 400 - Corporate Finance PDF Final new link

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400 Corporate Finance BRILLIANT’S

17,50,000
Operating Leverage =
11,50,000
= 1.52
Contribution 17,50,000
Combined Leverage = =
Profit Before Tax 5,10,000
= 3.43
The combined leverage of 3.43 implies that for 1% change in sales level, the % change in EPS
would be 3.43%. So, if the sales are expected to increase by 3%, then the % increase in EPS would
be 3 × 3.43 = 10.29%.
% change in EPS = 10.29%, if sales are expected to be increased by 3%. 

IMPORTANT FORMULAE

% Change in EBIT Contribution
DOL = or
% Change in sales EBIT

% Change in EPS EBIT
DFL = or
% Change in EBIT PBT
DOL and DFL can be combined to see the effect to total leverage on EPS. The Degree of
Combined Leverage (DCL) is calculated as follows:

% Change in EPS Contribution
DCL = DOL × DFL= or
% Change in Sales PBT


REVIEW QUESTIONS
Q.1. Explain the meaning and utility of operating leverage.
Am°naoqQ>J brdaoO H$m AW© VWm Cn¶mo{JVm g‘PmB¶o& [See Q.40]
Q.2. Explain the significance of financial leverage.
’$m¶Z|{e¶b brdaoO H$m ‘hÎd g‘PmB¶o& [See Q.41]
Q.3. Explain the combined effect of operating and financial leverages.
Am°naoqQ>J VWm ’$m¶Z|{e¶b brdaoO H$m g§¶w³V à^md g‘PmB¶o& [See Q.42]
Q.4. Differentiate between operating and financial leverage.
Am°naoqQ>J VWm ’$m¶Z|{e¶b brdaoO Ho$ ~rM A§Va ~VmB¶o& [See Q.43]

Q.5. Explain the terms 'operating risk' and financial risk.
'Am°naoqQ>J [añH$' VWm ’$m¶Z|{e¶b [añH$ nXm| H$mo g‘PmB¶o& [See Q.44]

