Finance Numericals

Combined Leverage:  It is a combination of financial and operating leverage. With the help of it we can find out the effects of fixed operating cost and fixed financial charges on operating profit and earnings per shares respectively. It measures the total risk of a firm. If operating leverage is greater than financial leverage than firm should try to reduce it to maintain the level of risk vice versa. Formula: If one income statement: Combined Leverage = contribution margin / earnings before tax (EBT)                                                OR If two income statements: Degree of Combined Leverage =% change in earnings before tax (EPS) / % change in sales                                                                                                     OR Degree of Combined Leverage (DCL) = DOL*DFL Where, DCL = Degree of Combined Leverage DOL = Degree of Operating Leverage DFL = Degree of Financial Leverage Example:  Find out the combined lev

Financial Leverage:  Financing additional assets through debt is known as Financial Leverage. If interest is higher than earnings is known as unfavourable finance leverage or if interest is less than earnings are known as favourable finance leverage. It helps to maximise the shareholders earning per share.It measure the financial risk in a company. Higher the fixed financial charges higher the degree of financial leverage. Advantages of Financial Leverage: ·          It is easy for a company to raise further capital. ·          It fulfil  the specific need of a company like acquisition, modernisation . ·          It increases the return on small investment. Disadvantages of Financial Leverage: ·          It increases the burden of debt on a company. ·          Company have to pay more interest on that debt amount. Formula: DFL= EBIT/EBT Where, DFL = Degree of financial leverage EBIT = Earnings before interest and tax EBT = Earnings before tax