9 yields 129 1 1 t 20000 pd dtl at 20000 units 20000

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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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