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share. The linear nature of the leverage relationship accounts for the fact that
sales changes of equal magnitude in opposite directions result in EPS changes of
equal magnitude in the corresponding direction. At this point, it should be clear
that whenever a firm has fixed costs—operating or financial—in its structure,
total leverage will exist. Measuring the Degree of Total Leverage (DTL)
degree of total leverage (DTL)
The numerical measure of the
firm’s total leverage. The degree of total leverage (DTL) is the numerical measure of the firm’s total
leverage. It can be computed much as operating and financial leverage are computed. The following equation presents one approach for measuring DTL:11
DTL Percentage change in EPS
Percentage change in sales (12.8) 11. This approach is valid only when the same base level of sales is used to calculate and compare these values. In
other words, the base level of sales must be held constant if we are to compare the total leverage associated with differen...
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