Ch 14

Chapter - 14 Financial and Operating Leverage

Chapter Objectives ,[object Object],[object Object],[object Object],[object Object],[object Object]

Capital Structure Defined ,[object Object],[object Object]

Questions while Making the Financing Decision ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Meaning of Financial Leverage ,[object Object],[object Object]

Measures of Financial Leverage ,[object Object],[object Object],[object Object],[object Object],[object Object]

Financial Leverage of Ten Largest Indian Companies, 2002

Financial Leverage and the Shareholders’ Return ,[object Object],[object Object]

EPS and ROE Calculations ,[object Object]

Effect of Financial Plan on EPS and ROE: Constant EBIT ,[object Object],[object Object],[object Object],[object Object],16.5% 12.0% 9 . ROE = (EBIT – INT) (1 – T )/ S 1.65 1.20 8 . EPS = (EBIT – INT) (1 – T )/ N 25,000 50,000 7. Number of ordinary shares, N 78,750 60,000 6. Total earnings of investors, PAT + INT 41,250 60,000 5. Profit after taxes, PAT = (EBIT – INT) (1 – T) 41,250 60,000 4 . Less: Taxes, T ( EBIT – INT ) 82,500 120,000 3. Profit before taxes, PBT = EBIT – INT 37,500 0 2 . Less: interest, INT 120,000 120,000 1. Earnings before interest and taxes, EBIT All-equity (Rs) Debt-equity (Rs) Financial Plan

Effect of Leverage on ROE and EPS

Effect of Financial Plan on EPS and ROE: Varing EBIT

Operating Leverage ,[object Object],[object Object]

Combining Financial and Operating Leverages ,[object Object],[object Object]

Financial Leverage and the Shareholders’ Risk ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Measuring Operating and Financial Risk ,[object Object],[object Object],[object Object]

Ch 14

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Ch 14