6 is used10 note that in the denominator the term 11

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Unformatted text preview: after-tax preferred stock dividend to a before-tax amount for consistency with the other terms in the equation. EBIT DFL at base level EBIT EBIT EXAMPLE I PD (12.7) 1 1 T Substituting EBIT $10,000, I $2,000, PD $2,400, and the tax rate (T 0.40) into Equation 12.7 yields the following result: $10,000 DFL at $10,000 EBIT $10,000 $2,000 $10,000 $4,000 $2,400 1 1 0.40 2.5 Note that the formula given in Equation 12.7 provides a more direct method for calculating the degree of financial leverage than the approach illustrated using Table 12.6 and Equation 12.6. Total Leverage total leverage The potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on the firm’s earnings per share. EXAMPLE We also can assess the combined effect of operating and financial leverage on the firm’s risk by using a framework similar to that used to develop the individual concepts of leverage. This combined effect, or total leverage, can be defined as the potential use of fix...
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This document was uploaded on 01/19/2014.

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