Unformatted text preview: y, the formula used in Equation 12.9 provides a more direct method for
calculating the degree of total leverage than the approach illustrated using Table
12.7 and Equation 12.8. The Relationship of Operating, Financial, and Total Leverage
Total leverage reflects the combined impact of operating and financial leverage
on the firm. High operating leverage and high financial leverage will cause total
leverage to be high. The opposite will also be true. The relationship between operating leverage and financial leverage is multiplicative rather than additive. The
relationship between the degree of total leverage (DTL) and the degrees of operating leverage (DOL) and financial leverage (DFL) is given by Equation 12.10.
DTL DOL DFL (12.10) 12. By using the formula for DTL in Equation 12.9, it is possible to get a negative value for the DTL if the EPS for
the base level of sales is negative. For our purposes, rather than show absolute value signs in the equation, we
instead assume that the base-level EPS is positive. CHAPTER 12 EXAMPLE Leverage and Ca...
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