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Accounting For Capital Structure

The document discusses capital structure and leverage. It defines capital structure as the mix of debt and equity used to fund a firm's operations. It also defines various leverage ratios like degree of operating leverage, degree of financial leverage, and degree of combined leverage. These ratios measure the sensitivity of earnings to changes in sales, costs, and capital structure. The document provides formulas to calculate earnings before tax, earnings per share, and the different leverage ratios.

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277 views1 page

Accounting For Capital Structure

The document discusses capital structure and leverage. It defines capital structure as the mix of debt and equity used to fund a firm's operations. It also defines various leverage ratios like degree of operating leverage, degree of financial leverage, and degree of combined leverage. These ratios measure the sensitivity of earnings to changes in sales, costs, and capital structure. The document provides formulas to calculate earnings before tax, earnings per share, and the different leverage ratios.

Uploaded by

satya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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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

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