Online degree of financial leverage (DFL) financial calculator to calculate sensitivity of EPS to changes in EBIT as a result of changes in debt.
The degree of financial leverage calculates the proportional change in net income that is caused by a change in the capital structure of a business. It is a measure of the sensitivity of EPS to changes in EBIT as a result of changes in debt. It can be seen as a sort of elasticity.
A mnemonic device to help in reminding DFL is that, if interest is 0, DLF will be equal to 1.
Formula:
DFL = Degree of financial leverage (DFL)
EBIT = Earnings before interest and taxes
TIEx = Total interest expense
Example: Degree of Financial Leverage
A firm has annual sales of $8 million. The firm's gross margin is 60%, and fixed costs are $3 million. The firm's annual interest expenses are $100,000. If we increase EBIT by 25%, how much will the company's EPS increase?
The company's DFL is calculated as follows:
DFL = ($8-$3.2-$3)/( ($8-$2.2-$3-$0.1)
DFL = $1.8/$1.7 = 1.059
If EBIT increases by 20%, the DFL indicates EPS will increase to 21.2% (20%×1.059 = 21.2%)