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equal magnitude in the corresponding direction. At this point, it should be clear
that whenever a firm has fixed costs—operating or financial—in its structure,
total leverage will exist. Measuring the Degree of Total Leverage (DTL)
degree of total leverage (DTL)
The numerical measure of the
firm’s total leverage. The degree of total leverage (DTL) is the numerical measure of the firm’s total
leverage. It can be computed much as operating and financial leverage are computed. The following equation presents one approach for measuring DTL:8
Percentage change in EPS
Percentage change in sales DTL (11.8) Whenever the percentage change in EPS resulting from a given percentage change
in sales is greater than the percentage change in sales, total leverage exists. This
means that as long as the DTL is greater than 1, there is total leverage.
EXAMPLE Applying Equation 11.8 to the data in Table 11.7 yields
50% 6.0 Because this result is greater than 1, total leverage exists. The higher the value,
the greater the degree of total leverage...
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This document was uploaded on 03/30/2014.
- Spring '14