Leverage in Business Finance

The concept of leverage is used by both investors and companies. Investors use leverage to significantly increase the returns that can be provided on an investment. They lever their investments by using various instruments, including options, futures, and margin accounts. Companies can use leverage to finance their assets. In other words, instead of issuing stock to raise capital, companies can use debt financing to invest in business operations in an attempt to increase shareholder value. To properly evaluate these statistics, it is important to keep in mind that leverage comes in several varieties, including operating, financial, and combined leverage. Fundamental analysis uses the degree of operating leverage. One can calculate the degree of operating leverage by dividing the percentage change of a company's earnings per share (EPS) by its percentage change in its earnings before interest and taxes (EBIT) over a period. Similarly, one could calculate the degree of operating leverage by dividing a company's EBIT by EBIT less interest expense. A higher degree of operating leverage shows a higher level of volatility in a company's EPS. In this course, the students will learn:

• Concept of Leverage

• Concept & Calculation of Operating Leverage

• Degree of Operating Leverage

• Concept & Calculation of Financial Leverage

• Degree of Financial Leverage

• Construction of Income Statement using Leverage