Measuring Financial Leverage Or Degree Of Financial Leverage (DFL)

Degree of financial leverage is the relationship between percentage change in earning per share and percentage change in earning before interest and tax (EBIT). It can also be determined by the relationship between EBIT and EBT (earning before tax). Iy measures the percentage change in earning per share (EPS) due to percentage change in EBIT. The financial leverage can be determined as given below.

Calculation Of DFL On The Basis Of Income Statement:

DFL = EBIT/Ebit-I = EBIT/EBT

Calculation Of DFL By Using Formula:

DFL = (Sales-variable cost- fixed cost/sales - variable cost-fixed cost-interest)
= S-VC-FC/S-VC-FC-I

Calculation Of DFL By Using Percentage Change Method:

DFL = % change in EPS/% change in EBIT

Where,
DFL = degree of financial leverage
EBIT = earning before interest and tax
EBT = earning before tax
EPS = earning per share
I = Interest