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How to calculate the degree of financial leverage?

幫考網(wǎng)校 2020-10-12 17:12:14
The degree of financial leverage (DFL) can be calculated using the following formula:

DFL = EBIT / EBIT - Interest

Where EBIT is earnings before interest and taxes, and Interest is the interest expense.

For example, if a company has an EBIT of $500,000 and an interest expense of $100,000, the DFL would be:

DFL = $500,000 / ($500,000 - $100,000) = 1.25

This means that for every 1% increase in EBIT, the company's earnings per share (EPS) will increase by 1.25%. A higher DFL indicates that the company has a higher level of financial risk and is more sensitive to changes in EBIT.
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