Introduction to Finance

combined leverage
. 
A fi rm’s 
degree of combined leverage (DCL)
is the percentage change in eps that results 
from a 1 percent change in sales volume.
The equation is as follows:
DCL =
Percentage change in eps
Percentage change in sales
(18-12)
A straightforward relationship exists among the degree of operating leverage, the degree of 
fi nancial leverage, and the degree of combined leverage. A fi rm’s DCL is the product of its 
degree of operating leverage and its degree of fi nancial leverage:
15
DCL = DOL × DFL 
(18-13)
degree of fi nancial leverage (DFL) 
measures the sensitivity of eps to 
changes in EBIT
combined leverage 
eff ect on 
earnings produced by the operating 
and fi nancial leverage
degree of combined leverage (DCL) 
percentage change in eps that results 
from a 1 percent change in sales 
volume
15
Recall that the DOL is the percentage change in EBIT divided by the percentage change in sales; the DFL is the 
percentage change in eps divided by the percentage change in EBIT. Multiplying these two formulas gives the 
defi nition of DCL in equation 18-12:
Percentage change in EBIT
Percentage change in sales
×
Percentage change in eps
Percentage change in EBIT
=
DOL × DFL =
Percentage change in eps
Percentage change in sales
= DCL

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18.7 Combined Operating and Financial Leverage Eff ects
587
The DCL represents the impact on eps of the eff ects of operating leverage and fi nancial lever-
age on a given change in sales revenue.
Let’s illustrate this concept with a full income statement for this year and a 10 percent 
decrease and a 10 percent increase in net sales for next year, as seen in 
Table 18.6
.
We can estimate, directly, the individual eff ects of operating and fi nancial leverage and 
their combined eff ects. First, from Chapter 14, the DOL is estimated in this way:
DOL =
Sales − Variable cost
Sales − Variable cost − Fixed cost
=
$700,000 − $420,000
$700,000 − $420,000 − $200,000
=
$280,000
80,000
= 3.50
This is the same as the percentage change in EBIT (35 percent) divided by the percentage 
change in sales (10 percent) in Table 18.6:
DOL =
35