Financial leverage

Financial Leverage

Is defined as the ability of the company to use its financial fixed charges, to increase the rates of change with earnings before interest and taxes on earnings per share.Financial leverage is related to the payment of interest and its effect on net income.
Leverage is used to measure changes in net income compared to changes in earnings before interest and taxes.

TheDegree of Financial Leverage (DFL) is a factor multiplied by the % change in earnings before interest and taxes, gives the % change in net income. This method is considered as fixed interest, as wellas a constant rate of tax.

DFL = Operating Income / Taxable Income

With the Degree of Operating Leverage (DOL), the company takes advantage of the fixed operating costs and expenses, ofinstalled capacity and financial leverage, financial resources of others.

Van Horner - In financial terms define leverage as the use of an asset or funds for which the company pays a fixed cost.

Thedegree of operating leverage can be defined as a factor multiplied by a percentage change in sales gives a percentage change in earnings before interest.

DOL = Marginal Contribution / Operating IncomeOne of the basic assumptions of the GAO is to consider a certain level of fixed costs unchanged.

Degree of Total Leverage (DTL) is a factor multiplied by a% change in sales gives the% change innet income to adjusted figures, obtained by multiplying the GAO by the GAF.

DTL = Marginal Contribution / Earnings Taxable

Total Leverage Model of the following bases:

I. Constant fixedcosts.
II. Fixed Variable Costs (per unit).
III. Fixed Interest Costs (Constant Tax Rate).

Based on these assumptions, the total leverage seeks the best use of the fixed costs of administration anddepreciation (operating leverage) and interest on borrowed capital (financial leverage).

Sales
Cost of Good Sold DOL
Gross Income...