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Subject 5. Capital Investments and Capital Structure PDF Download

The degree of financial leverage measures the sensitivity of net income to changes in operating income. Financial leverage is primarily driven by the issuer's capital structure.

DFL (degree of financial leverage) = %ΔNet Income /%ΔOperating Income

Unlike operating leverage, the degree of financial leverage is most often a choice by the company's management. Companies with a higher ratio of tangible assets to total assets may have higher degrees of financial leverage because lenders may feel more secure that their claims would be satisfied in the event of a downturn.

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