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Financial levarage or Trading on Equity
What is financial leverage?
Financial leverage refers to the use of fixed-interest or fixed-dividend bearing capital (debt and preference shares) in the capital structure to magnify the earnings available to equity shareholders.
What is the formula for calculating Degree of Combined Leverage (DCL)?
DCL equals Degree of Operating Leverage multiplied by DFL
What does 'Trading on Equity' mean?
Trading on equity means using borrowed funds (debt) at a fixed rate of interest to earn a higher return on equity, thereby increasing the earnings per share for equity holders.
What is the financial break-even point in leverage analysis?
EBIT level at which EPS equals zero after covering interest
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