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Leverage

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Leverage
16/07/2010

Degree of leverage
• The degree of leverage in a firm is calculated based on various indexes.

Leverage:, Operating,
Financial and Total

Some common indexes are:
Engineering Economy
Universidad Tecnológica de Bolívar
Ignacio Vélez Pareja
Professor
http://www.cashflow88.com/

1.Degree of operating leverage, DOL
2.Degree of financial leverage, DFL
3.Degree of total leverage, DTL

http://www.cashflow88.com/decisiones/decisiones.html

ivelez@unitecnologica.edu.co nachovelez@gmail.com Cartagena

7/16/2010

Financial and Ratio Analysis.
Vélez

1

Operating Leverage

Financial and Ratio Analysis.
Vélez

7/16/2010

2

Variable Costing
Q * USP – Q * (UVC +UVE) – FC – FE = EBIT

• Operating leverage is the degree to which a firm uses fixed costs in its operations. The higher the relative fixed costs (% of total costs), the higher the firm's degree of operating leverage. In firms with high degree of operating leverage, a small change in revenues will result in a larger change in operating income because most costs are fixed.

7/16/2010

Financial and Ratio Analysis.
Vélez

UPS = Unit Sales Price, UVC = unit variable cost,
UVE = unit variable expense, FC = fixed costs,
FE Fixed
FE = Fixed expenses
Q * [USP – (UVC +UVE)] –

UCM

FC – FE

= EBIT

Fixed cost CM

3

1

16/07/2010

Degree of operating
Leverage

Degree of Operating
Leverage DOL
• Degree of operating leverage
(DOL
(DOL) is the percentage change in
EBIT, divided by the percentage change in sales. It is a measure of the sensitivity of EBIT to changes in sales due to changes in operating expenses.

7/16/2010

Financial and Ratio Analysis.
Vélez

Apalancamiento
Operativo

5

DOL =

7/16/2010

ΔEBIT
ΔSales

MC

=

EBIT

Financial and Ratio Analysis.
Vélez

6

Example

Sales Revenues
- Variables Costs and expenses
CONTRIBUTION
MARGIN
- Fixed
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