**📅 Date:** ➤ ⌈ [[2025-04-10-Thu〚Leverage - DOL,DFL,DTL〛]]⌋ **💭Note:** ➤ ‼️Fix cost 🆙 DOL (Degree of Operating Leverage) 🆙 ➤ Total Leverage = Operating Leverage × Financial Leverage ⇩ 🅻🅸🅽🅺🆂 ⇩ **🏷️ Tags**: #💰/Economy-Class **🗂 Menu**: ⌈[[✢ M O C ➣ 04 ⌈A P R - 2 0 2 5⌉ ✢|2025 - A P R- MOC]]⌋ ⌈[[✢ L O G ➢ 04 ⌈A P R - 2 0 2 5⌉ ✢|2025 - A P R - LOG]]⌋ #👾/Private ➤ ⌈[[Cost]]⌋ --- ![[Screenshot 2025-05-16 at 07.20.36.png]] --- # 🌱 I. Abstract ## 🔹 What Is Leverage? **Leverage** is the use of fixed costs to magnify returns. In finance, it refers to how a company uses fixed operating or financing expenses to **amplify the effect of sales or earnings changes** on profitability. It **increases potential gain — but also risk**. ### 🧮 Total Leverage = **Operating Leverage × Financial Leverage** --- ## 🔹 Types of Leverage ### 🔧 1. Degree of Operating Leverage (DOL) **Operating leverage** arises from fixed operating costs (e.g., rent, salaries, equipment). The higher the fixed cost base, the more profits will fluctuate with changes in sales. #### 📐 Formula: ``` DOL = % Change in EBIT / % Change in Sales ``` #### 🔍 Interpretation: - High DOL = High **business risk** - If DOL = 3, a 10% increase in sales = 30% increase in EBIT - More leverage = more earnings sensitivity #### 🎯 Strategic Framing: > When the business is already operating, the **fixed costs you committed to** define your operating leverage. It’s the **opposite of using financial leverage to buy a house** — you're already in the game and amplifying outcomes from within. --- ### 💰 2. Degree of Financial Leverage (DFL) **Financial leverage** comes from using debt (or other fixed-cost financing) to fund the business. Interest payments are **financial fixed costs**. #### 📐 Formula: ``` DFL = % Change in Net Income / % Change in EBIT ``` #### 🔍 Interpretation: - High DFL = High **financial risk** - Amplifies net income fluctuations --- ### 🔗 3. Degree of Total Leverage (DTL) **Total Leverage = DOL × DFL** #### 📐 Formula: ``` DTL = % Change in Net Income / % Change in Sales DTL = DOL × DFL ``` #### 🔍 Why It Matters: - Shows how sensitive **net income** is to **sales changes** - Helps investors assess a company's **earnings volatility** and **risk structure** --- # 🪾 II. CFA Insight - Covered under **Corporate Finance & Equity** topics - Important for: - Forecasting earnings - Assessing operational risk - Calculating cost of capital (WACC) - Understanding how **fixed cost structures** amplify risk/return > High DOL or DFL → higher **required rate of return** → higher cost of equity or debt --- ## 🧠 Economic & Strategic Application - **Defensive business**: Low DOL + Low DFL (e.g., utilities) - **High-growth startup**: High DOL, but may avoid DFL early - **Real estate investing**: High DFL, low DOL (mortgage is the leverage) > #👾/Comment Reflect on Chinese mindset often values **low financial risk** — e.g., saving cash and buying property — a form of minimizing financial leverage and exposure to ==volatility==. --- # 🌳III. Quick Recap | Type | Definition | Risk Type | Example | |--------------------|----------------------------------------------|------------------|--------------------------------| | Operating Leverage | Using fixed operating costs | Business risk | Factory rent, software dev | | Financial Leverage | Using debt to fund business | Financial risk | Interest-bearing loans | | Total Leverage | Combo: Net income sensitivity to sales | Combined risk | Strategic risk assessment tool | ---