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)

                  Contribution Margin
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)

             EBIT
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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