Calculate the following with data(assumed) provided:

Return on investment 

Operating leverage 

Financial leverage 

Combined leverage

Solution

The solution is given below −

return on investment = EBIT/ (D + E)
return on investment = (S – VC – FC)/ (D + E)
return on investment = (1000000 – 375000 – 95000)/ (425000 + 590000)
return on investment = 530000/ 1015000
return on investment = 52.22%

operating leverage (OL) = (S – VC)/ EBIT
operating leverage = (1000000 – 375000)/ 530000
operating leverage = 625000/ 530000
operating leverage = 1.18

financial leverage (FL) =EBIT/ EBT
financial leverage = 530000/ (EBIT – I)
financial leverage = 530000/ (530000 – (425000*10%))
financial leverage = 530000/ (530000- 42500)
financial leverage = 530000/ 487500
financial leverage = 1.087

combined leverage = OL * FL
combined leverage = 1.18 * 1.087
combined leverage = 1.28

Here,

EBIT = Earnings before interest and tax.

EBT = earnings before tax and after interest.

I = interest on debentures.

Mandalika

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Updated on: 28-Sep-2020

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