Asked by Tarja Singh on Jun 03, 2024
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Provided a firm does not use an extreme amount of debt,financial leverage typically affects both EPS and EBIT,while operating leverage affects only EBIT.
Financial Leverage
Financial leverage involves using borrowed funds to increase the potential return on investment; however, it also increases the potential risk of loss if the investments do not perform well.
Operating Leverage
A measure of how revenue growth translates into growth in operating income, highlighting the fixed vs. variable cost structure of a company.
EBIT
Earnings Before Interest and Taxes refers to the profits of a company that are calculated by excluding interest and income tax expenses from its total expenses.
- Learn the significance of financial leverage and its repercussion on an enterprise's earnings per share (EPS) and earnings before interest and taxes (EBIT).
- Understand the relationship between a firm's operating leverage, business risk, and capital structure.
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Learning Objectives
- Learn the significance of financial leverage and its repercussion on an enterprise's earnings per share (EPS) and earnings before interest and taxes (EBIT).
- Understand the relationship between a firm's operating leverage, business risk, and capital structure.
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