IPCC Financial Management....... Practice Manual .......Q.No 13......
The formula for Financial Leverage is given as EBIT/EBIT-I
Can anybody explain this.
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Financial leverage
Replies (2)
FL=EBIT/EBT
EBIT=earnings before interest & tax
EBT=earnigs before Tax
So,EBIT-I means earnings before interest & tax minus Interest...that is ..earnigs before Tax
"I" here means interest
Consider example-:
EBIT=Rs.100000
10% debentures=Rs.10000
calculate EBT??
EBT=EBIT-Interest=100000 minus 1000 [10% of 10000]=Rs.99000
EBT can be expressed as EBIT - I.
Thus, instead of EBT in the denominator, it is substitued with EBIT - I
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