Accounting For Capital Structure and Leverage ► Degree of Combined Leverage [DCL] = % Change in EBT or EPS

% Change in Sales
Capital structure is the mix or allocation of debt capital and equity capital that
a firm uses to fund its operations and expansions. The capital structure is how a
► Earnings per share [EPS] = (EBIT - I) (1 - t) - Pd
firm finances its overall operations and growth by using different sources of funds.
No. of equity share (N)
Income Statement
Particulars Amount
Sales [S] xxxxxx
Less : Variable cost [VC] xxxxx At Indifference point of EBIT ,
Contribution Margin [CM] DOL EPS for Plan 1 = EPS for Plan 2
xxxxxx
Less : Fixed cost [FC] xxxxx
Earning before interest and tax [EBIT] xxxxxx (EBIT - I1) (1 - t) - Pd 1 = (EBIT - I2) (1 - t) - Pd2
DCL No. of equity share (N1) No. of equity share (N2)
Less : Interest [I] xxxxx Op
Earning before tax [EBT] xxxxxx
Less : Tax @...... xxxxx DFL
Earning after tax [EAT] xxxxxx
Less : Preference dividend [Pd] xxxxx - Without equity/common shares , limited company cannot be established.
Earning available to equity shareholders xxxxxx - With equity shares, a limited company can additionally issue debenture and
preference share capital.
- Interest must be paid for debenture, bond and loan.
- Preference dividend must be paid for preference share capital.
► Degree of Operating Leverage [DOL] = Contribution Margin [CM]
Earning before interest and tax [EBIT]
Degree of Operating Leverage [DOL] = % Change in EBIT
% Change in Sales

► Degree of Financial Leverage [DFL] = EBIT Or,

EBIT
EBT EBT - Pd
1-t
Degree of Financial Leverage [DFL] = % Change in EBT or EPS
% Change in EBIT

► Degree of Combined Leverage [DCL] = DOL x DFL

Degree of Financial Leverage [DFL] = CM Or, CM

EBT EBT - Pd
1-t