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Structure
Capital Structure
Capital structure : The combination of debt
and equity used to finance a firm.
Target capital structure : The mix of debt,
preferred stock and common equity with
which the firm plans to finance its
investments.
Optimal Capital Structure : Optimal capital
structure is the one that strikes a balance
between risk & return to achieve ultimate
goal of maximizing the price of the stock.
Degree of Leverage
Degree of Operating Leverage (DOL)
DOL is defined as the percentage change in
operating income (EBIT) associated with a given
percentage change in sales. DOL is concerned with
the upper portion of the Income Statement.
DOL for a particular level of production and sales,
Q, can be computed using the following equation :
DOL Q = Q ( PV )____
Q(PV)F
DOL , based on dollar sales rather than units, can be
computed using the following equation :
DOL S = S VC___ = Gross Profit
S VC F
EBIT
Degree of Leverage
Degree of Financial Leverage (DFL)
DFL is defined as the percentage change in
earnings available to common stockholders
associated with a given percentage in earnings
before interest and taxes.
DFL is concerned with the lower part of the
Income Statement .
EBIT___
EBIT I
Degree of Leverage
Degree of Total Leverage (DTL)
DTL is defined as the percentage change in EPS
that results from a given percentage change in
sales.
DTL shows the effects of both operating leverage
and financial leverage.
2. DTL =
Q (P V )__
Q (P-V) F- I
3. DTL = ___S VC___ =
Gross Profit
S VC F- I
EBIT - I
Degree of Leverage
NOTE :
I
VC
F
S
= Interest
= Variable Cost
= Fixed Cost
= Sales
Capital Structure
MATH