Matakuliah
Tahun
: Manajemen Keuangan 1
: 2009
Degree of Combined Leverage
Pertemuan 10
Degree of Combined
Leverage (DCL)
• Combined leverage: by using operating
leverage and financial leverage, a small
change in sales is magnified into a larger
change in earnings per share.
• This “multiplier effect” is called the
degree of combined leverage.
Bina Nusantara University
3
Degree of Combined Leverage
DCL = DOL x DFL
% change in EPS
=
% change in Sales
=
Bina Nusantara University
change in EPS
EPS
change in Sales
Sales
4
Degree of Combined Leverage
• If we have the data, we can use this
formula:
Sales - Variable Costs
EBIT - I
DCL =
=
Bina Nusantara University
Q(P - V)
Q(P - V) - F - I
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What does this tell us?
• If DCL = 4, then a 1% increase in
sales will result in a 4% increase in
earnings per share.
Sales
Bina Nusantara University
EBIT
EPS
Stockholders
6
Off-class Project:
• Based on the following information on
Levered Company, answer these
questions:
1) If sales increase by 10%, what should
happen to operating income?
2) If operating income increases by 10%,
what should happen to EPS?
3) If sales increase by 10%, what should be
the effect on EPS?
Bina Nusantara University
7
Levered Company
Sales (100,000 units)
Variable Costs
Fixed Costs
Interest paid
Tax rate
Common shares outstanding
Bina Nusantara University
$1,400,000
$800,000
$250,000
$125,000
34%
100,000
8
Leverage
Sales
DCL
EPS
Bina Nusantara University
DOL
DFL
EBIT
9
Degree of Operating Leverage
from Sales Level (S)
DOLs =
=
Sales - Variable Costs
EBIT
1,400,000 - 800,000
350,000
= 1.714
Bina Nusantara University
10
Degree of Financial Leverage
DFL =
EBIT
EBIT - I
=
350,000
225,000
= 1.556
Bina Nusantara University
11
Degree of Combined Leverage
DCL =
=
Sales - Variable Costs
EBIT - I
1,400,000 - 800,000
225,000
= 2.667
Bina Nusantara University
12
Levered Company
Sales
DCL
=
2.667
EPS
Bina Nusantara University
DFL =
1.556
DOL = 1.714
EBIT
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Levered Company
10% increase in sales
Sales (110,000 units)
Variable Costs
Fixed Costs
EBIT
Interest
EBT
Taxes (34%)
Net Income
EPS
Bina Nusantara University
1,540,000
(880,000)
(250,000)
410,000 ( +17.14%)
(125,000)
285,000
(96,900)
188,100
$1.881 ( +26.67%)
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