Q. Definition of financial leverage?
One of the goals of planning an appropriate capital structure is to maximize the return on equity shareholders fund or else maximize the earning per share. a number of authorities have used the term 'financial leverage' in the context that it defines the relationship between EBIT as well as EPS. As-per to the Gitman 'financial leverage' is the ability of a firm to use fixed financial charges to magnify the effects of change in EBIT on the firm's earning per share. The financial leverage so indicate the percentage change in earning per share in relation to a percentage change in EBIT. The degree of financial leverage is able to be written as follows:
Degree of financial leverage = Percentage change in EPS / (DFL) Percentage change in EBIT