Essentials of Financial Management, 5th Edition by Pearson

CHAPTER 11

Operating and Financial Leverage

LEARNING OBJECTIVES

• Explain the concept of operating and financial leverage
• Discuss the alternative measures of operating and financial leverage
• Understand the risk and return implications of financial leverage
• Analyse the combined effect of financial and operating leverage
• Highlight the difference between operating risk and financial risk

INTRODUCTION

The term leverage is derived from the word lever. In mechanical sense, the function of lever is to provide force or momentum or speed. The common meaning of the term leverage is an advantage to achieve desired results. For example, many students leverage their knowledge of mathematics to do well in finance courses. In business context, we often ...