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Calculate the following with data(assumed) provided:nReturn on investmentnOperating leveragenFinancial leveragenCombined leverage
|Variable cost (VC)||375000|
|Fixed cost (FC)||95000|
|Interest on debt||10%|
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
EBIT = Earnings before interest and tax.
EBT = earnings before tax and after interest.
I = interest on debentures.
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