Degree of financial leverage

CFA Level I Corporate Finance
#1

Hello Everyone,

Risk on securities depends on both operating as well financing risk of business which are respectively measures by DOL & DFL.

As DFL measures the senstivity of future CF to owners or net income due to change in operating income.This risk is orginates due to choice of capital structure.

As operating income does not includes fixed interest expense to debt holders whuch affect the NI not operating income.

As per my understanding then this senstivity has to be towards fixed interest expense rather than operating income which is affected by fixed production cost .

THANKS

#2

Correct.

Degree of operating leverage (DOL) depends on fixed operating costs, while degree of financial leverage (DFL) dpeneds on fixed interest expense.

I wrote a series of articles on these that may be of some help:

#3

Hello Magician,

Thanks for the support to new bie like us the link was fruitful.

The answer of my problem is what I have learnt

if there is no interest exp then DFL is one for every level of of operating income but when fixed interest expense comes then as per the level of operating income the PAT or NI comes which helps in calculation of DFL .

Thanks smiley

#4

My pleasure.