leverage

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By: Ibians (43 month(s) ago)

hello, very valuable. plz share it with me. i desperately need it

By: Ibians (43 month(s) ago)

hello, very valuable. plz share it with me. i desperately need it

By: Ibians (43 month(s) ago)

hello, very valuable. plz share it with me. i deaperately need it

Presentation Transcript

PRESENTATION ON LEVERAGE ANALYSIS:

PRESENTATION ON LEVERAGE ANALYSIS Presented by : Nirupam Saha (2k10mkt19 )

Leverage analysis :

Leverage analysis The dictionary meaning of the firm leverages refers to "an increase means of accomplishing purpose". In machines, leverages means the instrument that helps us in lifting heavy objects, which may not be other wise possible. This concept of leverage is valid in business too. In financial management, it is used to describe the firms ability to use fixed assets costs funds to satisfy to magnify return of its owners

DEFINATION :

DEFINATION "Leverage is the ratio of the net rate of return on shareholder's equity and net rate of return on total capitalization."

Types of leverage :

Types of leverage There are three types of leverages : Financial leverage Operating leverage Composite leverage

financial leverage:

financial leverage financial leverage exists whenever a firm has debts other sources of funds that carry fixed charges. Computation of financial leverage 1. Where capital structure consists of equity shares and debt- financial leverage = EBIT/(EBIT-INT) or EBIT/EBT or OP/(EBT or PBT) 2. Where the capital structure consists of preference share and equity share F.L = EBIT/ (EBIT-PD * 1/(1-t)) 3. Where the capital structure consists of preference share, equity shares and debt. F.L = EBIT/ (EBIT-INT-(PD * 1/(1-t)))

:

Degree of financial leverage DFL = % changes in EPS / % change in EBIT Importance of financial leverage Capital structure management Maximization of EPS and market value of shares Measurement of Risk

Operating leverage:

Operating leverage Operating leverage is the tendency of the operating profit to vary disproportionately with sales. Operating leverage OL = C / ( OP or EBIT ) contribution = Sales - Variable cost operating profit = contribution - fixed cost Degree of operating leverage DOL = % Change in OP or EBIT / % change in sales

Composite leverage :

Composite leverage Composite leverage is calculated to determine the combined effect of operating and financial leverages. CL = Financial leverage x Operating leverage or C / PBT Degree of combined leverage DCL = DOL * DFL = % change in EPS / % change in Sales

Example : :

Example : A firm selling price of its product is $100 per unit. The variable cost per unit is $50 and the fixed operating costs are $50,000 per year. The fixed interest expenses (non-operating) are $25,000 and the firm has 10,000 shares outstanding. Let us evaluate the combined leverage resulting from sale of 1) 2000 units & 2) 3000 units. Tax rate = 35%.

Solution:

Solution

Slide 11:

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