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Combined Leverage - Capital Structure, Accountancy and Financial management Video Lecture | Accountancy and Financial Management - B Com
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FAQs on Combined Leverage - Capital Structure, Accountancy and Financial management Video Lecture - Accountancy and Financial Management - B Com
| 1. What is combined leverage in capital structure? |  |
Ans. Combined leverage in capital structure refers to the use of both operating leverage and financial leverage by a company to determine its overall risk and return. It combines the effects of both fixed costs (operating leverage) and fixed financial obligations (financial leverage) on a company's earnings per share (EPS) and return on equity (ROE).
| 2. How is combined leverage calculated? | |
Ans. Combined leverage can be calculated by multiplying the degree of operating leverage (DOL) with the degree of financial leverage (DFL). The formula is as follows:
Combined Leverage = Degree of Operating Leverage (DOL) * Degree of Financial Leverage (DFL)
The DOL can be calculated by dividing the percentage change in operating profit by the percentage change in sales revenue. The DFL can be calculated by dividing the percentage change in EPS by the percentage change in operating profit.
| 3. What is the significance of combined leverage in financial management? | |
Ans. Combined leverage is significant in financial management as it helps in understanding the impact of fixed costs and financial obligations on a company's profitability and risk. By analyzing combined leverage, financial managers can make informed decisions regarding the capital structure of the company, such as the proportion of debt and equity financing. It also helps in assessing the potential effects of changes in sales volume or operating profit on the company's EPS and ROE.
| 4. How does combined leverage affect a company's risk and return? | |
Ans. Combined leverage affects a company's risk and return by magnifying the impact of changes in sales volume or operating profit. If a company has high combined leverage, a small change in sales volume can lead to a significant change in EPS and ROE. This means that the company's risk also increases as any adverse changes in sales or operating profit can have a substantial negative impact on profitability. On the other hand, if the company experiences favorable changes, the return on equity can also increase significantly.
| 5. How can a company manage its combined leverage effectively? | |
Ans. A company can manage its combined leverage effectively by carefully analyzing its capital structure and making informed decisions regarding the proportion of debt and equity financing. By maintaining an optimal capital structure, the company can balance the benefits of financial leverage with the risks associated with fixed financial obligations. Additionally, the company can also focus on improving its operating efficiency, reducing fixed costs, and diversifying its revenue sources to minimize the overall impact of combined leverage on its risk and return.
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Nov 22, 2024 Last updated |
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