Syllabus Overview

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View Syllabus Outline (4 topics)

Leverages & Capital Structure

1. Meaning and Types of Leverages

  • Operating Leverage: Measures the sensitivity of Operating Profit (EBIT) to changes in Sales. Driven by fixed operating costs.
  • Financial Leverage: Measures the sensitivity of Earnings Per Share (EPS) to changes in EBIT. Driven by fixed interest charges.
  • Combined Leverage: The overall impact of changes in sales on EPS.

2. Capital Structure Theories

  • Net Income (NI) Approach: Capital structure affects cost of capital; higher debt lowers WACC.
  • Modigliani-Miller (MM) Hypothesis: Capital structure is irrelevant to firm value in a perfect market without taxes.