Financial Management: Operating Leverage, ROE, and Financial Leverage

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:

1
FINANCIAL MANAGEMENT
Table of Contents
Part A...............................................................................................................................................2
Computation of Operating Leverage...........................................................................................2
Computation of ROE...................................................................................................................2
Computation of the Financial Leverage......................................................................................3
Comparisons and Findings..........................................................................................................3
Part B...............................................................................................................................................4
Reference.........................................................................................................................................7

2
FINANCIAL MANAGEMENT
Part A
Computation of Operating Leverage
Particulars 2016 2017 2016 2017
Sales 10.7 11.6 13.9 14.6
EBIT 5.7 6.2 7.4 8.1
Change in Sales
Change in EBIT
Operating Leverage
Company A Company B
1.04 1.88
8.41%
8.77%
5.04%
9.46%
As per the above table which shows the operating leverage computation. Operating
leverage shows the measure of the fixed and variable costs which are incurred on a project
(Axelson et al. 2013). As per the above calculations, the operating leverage of Company B is
higher which is shown to be 1.88 and the operating leverage of Company A is shown to be 1.04.
Computation of ROE
Particulars Company A Company B
EBIT 5.7 7.4
Less: Interest 0.6 1
Cash to Equity 5.1 6.4
Equity 4.9 6.3
ROE 104% 102%