Calculate the following with data(assumed) provided:nReturn on investmentnOperating leveragenFinancial leveragenCombined 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.