Unformatted text preview: 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 11.10.
EXAMPLE DOL DFL (11.10) Substituting the values calculated for DOL and DFL, shown on the right-hand
side of Table 11.7, into Equation 11.10 yields
DTL 1.2 5.0 6.0 The resulting degree of total leverage is the same value that we calculated directly
in the preceding examples. Review Questions
11–1 What is meant by the term leverage? How are operating leverage, financial
leverage, and total leverage related to the income statement?
11–2 What is the operating breakeven point? How do changes in fixed operating costs,...
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