Capital Structure Theories LET US SUM UP - Accounts and Finance for Managers

Leverage means the fixed commitment of the organization. The fixed commitment of the organization can be classified into two different categories viz fixed cost of operations and fixed cost of servicing. Operating leverage is a relationship in between the Saleand Earnings before interest and taxes. Financial leverage is a relationship in between the Earnings before interest and taxes and Earnings per share. The operating leverage is related to the operating risk of the investments, which means that fixed cost of operations of the enterprise. It highlights that greater the fixed cost of operations means that higher the operating risk; which means that greater will be break even point and vice versa.

The greater volume of fixed cost of operations are found to be more favorable only during the occasion of greater volume of earnings, unless otherwise the dominance of fixed cost of operations are found to be undesirable to magnify the volume of EBIT. The other name of the financial leverage is Trading on Equity, which illustrates the relationship in between the application of the fixed charge of funds in the capital structure and Earning per share. It is the leverage analysis highlights the relationship in between the financing decision and investment decision. EBIT-EPS analysis is an analysis to study the impact / effect of the leverage.


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