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37 Measure of leverage (Leverage and risk (Leverage (Financial leverage…

- - - - Degree of operating leverage (DOL)
        
        percentage change in EBIT that results from a given percentage change in sales
      - results from fixed operating cost
    - - Degree of financial leverage (DFL)
        
        The sensitivity of the cash flows available to owners when operating income (EBIT) changes.
      - results from the use of debt financing and its associated fixed costs
      - The effect of financial leverage
        
        • reduces net income due to the added interest expense
        
        • increase equity owner’s ROE
        
        • increase the rate of change (risk) for ROE
    - - the sensitivity of net income to changes in the number of units produced and sold
  - - - variability of operating earnings (EBIT)
      - Sales risk
        
        price
        
        quantity of goods and services
      - Operating risk
        
        operating cost structure
    - - variability of EPS