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Unformatted text preview: structure decisions.
The three basic types of leverage can best be defined with reference to the firm’s
income statement, as shown in the general income statement format in Table 11.1.
• Operating leverage is concerned with the relationship between the firm’s
sales revenue and its earnings before interest and taxes, or EBIT. (EBIT is a
descriptive label for operating profits.)
• Financial leverage is concerned with the relationship between the firm’s EBIT
and its common stock earnings per share (EPS).
• Total leverage is concerned with the relationship between the firm’s sales revenue and EPS. TABLE 11.1 General Income Statement Format and Types
Less: Cost of goods sold Operating leverage Gross profits
Less: Operating expenses
Earnings before interest and taxes (EBIT)
Net profits before taxes
Less: Taxes Financial leverage Net profits after taxes
Less: Preferred stock dividends
Earnings available for common stockholders
Earnings per share (EPS) Total leverage CHAPTER 11 Leverage and Capital Structure 423 We will examine the three types of leverage concepts in d...
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- Spring '14