By combining the degree of operating leverage with the degree of financial leverage we obtain the degree of total leverage (DTL). If a firm has a high amount of operating leverage and financial leverage, a small change in sales will lead to a large variability in EPS.

Formula 11.20

DTL = Q(P - V)  
         Q(P - V) - F - I

 

Example: degree of total leverage
Using our previous example, say Newco produces 140,000 units annually. The company's variable costs are $20 per unit, and its fixed costs total $2.4 million. The company's annual interest expense amounts to $100,000 annually. If Newco's sales increase by 20%, what is the impact to the company's EPS?

Answer:
DTL = 140,000(50-20)/140,000(50-20)-2,400,000 - $100,000 = 2.47

If Newco's sales increase by 20%, the company's EPS will increase by 49.4% (20%)(2.47).



Dividend Theories

Related Articles
  1. Investing

    Leverage: Is It Good for Your Portfolio?

    Discover the concept of financial leverage. Learn multiple ways to get leverage in your portfolio, and decide if leverage is a good idea for you.
  2. Personal Finance

    Borrowing Smart In A Debt-Filled World

    Leveraging your money can have many perks, but it's not always the smartest financial plan.
  3. Investing

    Explaining Leveraged Loans

    Leveraged loans are loans extended to companies or people who already have large amounts of debt.
  4. Financial Advisor

    Introduction To Hedge Funds

    Find out how these highly leveraged funds operate.
  5. Trading

    Adding Leverage To Your Forex Trading

    The use of margin to trade in the foreign exchange market can magnify profit opportunities.
  6. Managing Wealth

    Leveraging Leverage For Bigger Profits

    Leverage is like fire. Find out how to use it to heat up your investing without burning your portfolio.
  7. Investing

    4 Mistakes to Avoid When Trading Leveraged ETFs

    Learn the common mistakes made with leveraged ETFs, and discover how you can lose money even if you are right on the direction of a market sector.
  8. Investing

    Leverage's "Double-Edged Sword" Need Not Cut Deep

    Learn to cut out losses quickly, leaving profits room to grow.
  9. Retirement

    Should Retirees Take a Gamble on Leveraged ETFs?

    Leveraged ETFs offer the potential for big rewards, but retirees must weigh the risks before adding them to their portfolio.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center