Liquidity, Solvency, and Leverage Ratios - Leverage
5 important questions on Liquidity, Solvency, and Leverage Ratios - Leverage
What is a general statement of leverage (formula)?
Pre-fixed-cost income amount
Degree of Leverage = _______________________________________
Post-fixed-cost income amount
What is the formula for a single period?
Degree of Operating Leverage (DOL)
DOL = _____________________________
Operating Income or EBIT
What is the formula for the percentage-change version of DOL?
Degree of Operating Leverage (%∆DOL)
What does it express?
%∆ in operating income or EBIT
DOL (%∆) = _____________________________
%∆ in sales
It does express the percentage change in EBIT generated by each 1% change in sales.
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What is the formula for a single period?
Degree of Financial Leverage (DFL)
DFL = ________________
EBT
What is the formula for the percentage-change version of DFL?
Degree of Financial Leverage (%∆DFL)
What does it express?
%∆ in net income
DFL (%∆) = _____________________________
%∆ in EBIT
It does express the percentage change in net income generated by each 1% change in EBIT.
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