Leverage (from the English leverage) has the following meanings:

proportion, the ratio of capital investments in fixed income securities, for example, bonds, preferred shares, and investments in non-fixed income securities, for example, ordinary shares;

the ratio of the stock of goods and the amount of capital;

A company's equity to debt ratio.

Possible spelling of the term - leverage, leverage - Lozovsky L.Sh., Raizberg B.A., Ratnovsky A.A. Universal business dictionary. - M.: INFRA - M., 1997. - p. 190.

Leverage- the use of borrowed funds at a fixed interest rate to increase profits for common stockholders. Also known as the “leverage principle” and generally describes the lending process - Van Horne J.K. Fundamentals of financial management.: Per. from English / Ch. ed. series by Ya.V. Sokolov. - M.: Finance and Statistics, 1996. - p. 449.

Effect financial leverage - this is an increase in profitability own funds, obtained through the use of a loan, despite the payment of the latter. - Financial management: theory and practice. Textbook / Under. ed. E.S. Stoyanova. - M.: Publishing house "Perspective", 1998. - p. 150.

From various definitions of financial leverage (leverage) it is clear that an additional effect from investing and operating funds in the course of the enterprise’s activities can be obtained by using borrowed funds with a fixed interest rate. Such funds also include funds raised through the issuance of bonds and preferred shares, which also provide for the payment of fixed interest.

Let's consider an example of the effect of financial leverage.

Background information:

Based on the results of its activities in 1999, the American stationery company called Red Tape was successful in the market of Eastern Europe. Her self-sharpening pencils were especially popular. The Eastern European market was not yet saturated with them and, trying to quickly expand its influence in this sector before the arrival of competitors, the Red Tape company, represented by the administration, planned at the beginning of 2000 to purchase additional equipment for the production of self-sharpening pencils, which would increase production capacity twice. This required an additional $1 million. Heated disputes broke out between the company's president, Walter, and the chairman of the board of directors, Stevens, over the sources of financing. The essence of the disagreement was as follows:

Walter proposed issuing $1 million worth of common stock in the amount of 10,000 shares with a face value of $100, which aroused the concerns of Stevens, who had a controlling stake in the Red Tape company. Stevens feared losing control of the company, whose authorized capital at the time of the dispute was $1 million, and Stevens's share in it was 52 percent (i.e., a total of $520 thousand). He understood that after issuing additional shares worth $1 million, the company's authorized capital would be $2 million, and his $520,000 would give him a 26 percent stake, which is not at all enough for a controlling stake.

Stevens proposed organizing the issue of corporate bonds in the amount of $1 million in the amount of 10 thousand pieces with a face value of $100, since in this case the value authorized capital doesn't change, which suits Stevens just fine. This proposal outraged Walter, because, in his opinion, the issue of bonds, increasing the level of debt of the company as a whole, worsens the indicator of financial stability. Even Stevens's proposal to lower the dividend rate to the level of the interest rate on bonds (up to 10 percent per annum) did not affect Walter's opinion, who believed that this did not provide any gain for the company.

It is necessary, taking the position of Chairman of the Board of Directors Stevens, to prove that the issue increases the sources of financing for the Red Tape company compared to the issue of ordinary shares, taking into account that:

1. The income tax rate is 0.5;

2. The total profitability of production (before interest and taxes) is 20 percent per annum.

The results of the company’s activities with various sources of financing, provided that the profit tax rate is 0.5 and the overall profitability of production (before interest and tax) is 20 percent per annum, are presented in Table 7.

Table 7. Financial results of the company

Indicators		Stevens option
Total capital Authorized capital Bond loan	2000 thousand dollars 2000 thousand dollars	2000 thousand dollars 1000 thousand dollars 1000 thousand dollars
Total profit (before interest and tax)	400 thousand dollars	400 thousand dollars
Payments of coupon income on bonds		100 thousand dollars
Profit before tax	400 thousand dollars	400 thousand dollars
Income tax	200 thousand dollars	150 thousand dollars
Net profit	200 thousand dollars	150 thousand dollars
Dividend payments	200 thousand dollars	100 thousand dollars
retained earnings		50 thousand dollars
Income per share
Stock return

As can be seen from the above calculation, according to Stevens’ option, the company at the end of the year will have additional financing of 50 thousand dollars of retained earnings. This, in turn, increases the stock's yield to 15 percent, which Stevens is naturally interested in as well. The effect of financial leverage is evident.

How does financial leverage work?

It is easy to see that this effect arises from the discrepancy between economic profitability and the “price” of borrowed funds - the average interest rate (AR). In other words, the enterprise must achieve such economic profitability (ER) that there are enough funds at least to pay interest on the loan. The average interest rate, as a rule, does not coincide with the interest rate mechanically taken from the loan agreement. A loan at 60 percent per annum for a period of 3 months (1/4 year) actually costs 15 percent.

Interest payments on loans can come from two main sources. First, they can be written off against the cost of products manufactured by the enterprise, within the limits of the Central Bank rate plus 3 percent. Taxes do not affect this part of financial costs. The second source is profit after taxes. In this case, when analyzing to obtain actual financial costs, the corresponding interest amounts must be increased by the amounts transferred to the state budget in the form of taxes.

For example: the amount of interest paid from the profit remaining at the disposal of the enterprise is 100 thousand rubles.

The profit tax rate is 35 percent.

Actual financial costs in terms of interest paid from the profit remaining at the disposal of the enterprise - 135 thousand rubles.

In addition to formula (62), you can calculate the average interest rate not from the arithmetic mean, but from the weighted average cost of various loans and borrowings. You can also count as borrowed funds the money received by the enterprise from the issue of preferred shares. Some economists insist on this because preferred shares pay a guaranteed dividend, which is similar to this method raising capital by borrowing funds and, in addition, during the liquidation of the enterprise, the owners of preferred shares have almost equal rights with creditors to what is due to them. But in this case, the financial costs should include the amount of dividends, as well as expenses for the issue and placement of these shares.

And if, for example, the standard for attributing interest to cost at the end of 1998 was (60% + 3%) = 63%, and the loan was provided to the enterprise at 70% per annum, then, taking into account tax savings, such a loan would cost the borrower (1 - 0. 35) 63% + (1 + 0.35) (70% - 63%) = 50.40%.

To calculate the effect of financial leverage, we highlight the first component - this is the so-called differential, those. the difference between the economic return on assets (ER) and the average calculated interest rate (AS). Taking into account taxation, the differential is equal to or approximately 2/3 (ER-SP).

The second component is lever arm- characterizes the force of the lever. This is the ratio between debt and equity. Let's combine both components of the lever effect and get:

Let's take enterprise A, which has 250 thousand rubles. own and 750 thousand rubles. borrowed money. The economic return on assets for enterprise A is 20 percent.

Borrowing costs, say, 18 percent. For such an enterprise, the leverage effect will be

The first way to calculate the level of financial leverage effect:

Based on the basic definition of the effect of financial leverage, return on equity (ROC) will be determined by formula 65:

When using borrowed funds, you should remember two important rules:

If new borrowing brings the enterprise an increase in the level of financial leverage effect, then such borrowing is profitable. But at the same time, it is necessary to carefully monitor the state of the differential: when increasing leverage, the banker is inclined to compensate for the increase in his risk by increasing the price of his “product” - a loan.

The lender's risk is expressed by the value of the differential: the larger the differential, the lower the risk; the smaller the differential, the greater the risk.

Credit conditions may worsen with an irrepressible increase in borrowing.

Enterprise A, considered above, with a leverage effect of 4 percent and a differential of 2 percent, with an increase in the cost of credit by only 1 percentage point, will have to increase the leverage 6 to maintain the previous leverage effect.

EGF = 2/3 (20% - 19%) 6 = 4%.

To compensate for an increase in loan costs of just 1 percentage point, enterprise A is forced to double the ratio between borrowed and equity funds.

Then there may come a time when the differential becomes less than zero. The effect of leverage will then act only to the detriment of the enterprise if, for example, with a nine-fold ratio of borrowed and equity funds, you have to pay an average rate of 22 percent on a loan, then the effect of leverage and the return on equity of enterprise A will be:

To identify the optimal relationships between return on equity, economic return on assets, average interest rate and leverage, we will draw graphs (Fig. 6).

From these graphs it is clear that the smaller the gap between Er and the average interest rate (AR), the larger the share that must be allocated to borrowed funds to raise the RSS, but this is unsafe when the differential decreases.

For example, to achieve a 33 percent ratio between the leverage effect and PCC (when the success of an enterprise is 1/3 ensured by the financial side of the business and 2/3 by production), it is desirable to have

lever arm 0.75 at ER = 3SP

lever arm 1.0 at ER = 2SP

lever arm 1.5 at ER = 1.5SP

Thus, ER = 3 SRSP

ER = 2 SRSP

ER = 1.5 SRSP

The second concept of the financial leverage effect

The effect of financial leverage can also be interpreted as the percentage change in net income for each ordinary share generated by a given percentage change in the net result of operating an investment (earnings before interest on loans and taxes). This perception of the effect of financial leverage is typical mainly for the American school of financial management.

According to the second concept of the effect of financial leverage, the strength of the impact of financial leverage is determined by formula 66:

Using this formula, they answer the question by how many percent the net profit for each ordinary share will change if the net result of operating the investment changes by one percent.

Based on the fact that the net operating result of investments (NREI) can be calculated as the sum of book profit and financial costs of the loan attributable to the cost of production, formula (66) can be transformed as follows:

Using this formula, the following conclusions can be drawn: the greater the power of financial leverage, the greater the financial risk associated with the enterprise:

1. The risk of not repaying the loan with interest for the banker increases.

2. The risk of falling dividends and stock prices for the investor increases.

Introduction

Today, in the modern economy, the capital of an enterprise and its effective use occupy a very important place. Correct and complete use of capital is the main source of profit for the company. Therefore, the organization must promptly identify ways to increase it and methods of effective use.

In order to determine the optimal ratio of own and borrowed funds, an indicator such as the effect of financial leverage comes to the rescue.

The relevance of this topic lies in the fact that the effective and correct formation of the capital structure will lead to a greater increase in profits and expansion of production.

The object of study of the course work is the company OJSC Gazprom.

The subject of research in this work is the assessment of the efficiency of using the company's own and borrowed capital. The purpose of the course work is to find out whether OAO Gazprom effectively uses its own and borrowed capital. To achieve this goal, it is necessary to solve the following tasks:

Study the concept and essence of financial leverage and its effect:

Consider the procedure for calculating the effect of financial leverage;

Become familiar with the concepts of the financial leverage effect and identify their differences;

Conduct an analysis of the assessment of the effect of financial leverage using the example of the OJSC Gazprom enterprise.

The main source for analysis in this course work served as the company’s financial statements, namely Form No. 1, Form No. 2 “On Comprehensive Income”, Form No. 3 “Cash Flow Statement”.

When writing this work I used educational literature in disciplines such as financial management and economic analysis. Other Internet sources were also used.

The concept and essence of the financial leverage effect

It's no secret - in order for an enterprise to be able to correctly and effectively manage the formation of its profits, certain knowledge and skills are required. In modern economics, many organizational and methodological concepts are used, as well as methods of analysis and profit planning.

Those companies that plan to use borrowed capital in their activities know that the obligations to raise funds remain unchanged throughout the duration of the loan agreement or the circulation period of the securities.

The costs that will entail the attraction of borrowed sources of financing do not change in any way with an increase/decrease in production volume and the number of products sold. At the same time, these costs directly affect the amount of profit that the company has at its disposal.

Obligations to raise loans or use debt securities are considered operating expenses, so borrowed funds are generally less expensive for a company than other sources of financing. At the same time, an increase in the share of borrowed funds in the capital structure increases the level of risk of insolvency of the company. It follows that it is necessary to determine the optimal combination between equity and debt capital.

To determine the correct and effective combination of capital elements, companies often use financial leverage.

Financial leverage is an economic phenomenon that is caused by attracting borrowed sources of financing, regardless of their cost. At the same time, the return on equity will increase faster than the economic return on assets.

Financial leverage makes it possible to manage a company's profit by changing the ratio of equity and borrowed funds.

This tool determines the impact of the capital structure on the profit of the enterprise. The size of the ratio of borrowed capital to equity also characterizes the degree of risk and financial stability. The smaller the lever, the more stable the position. When a company raises debt capital, it incurs ongoing interest costs, which in turn increases the risk of the enterprise.

An indicator reflecting the level of additional profit when using borrowed capital is called the effect of financial leverage. This indicator is the most important factor, which influences the decision on the ratio of elements in the capital structure. If the company's borrowed funds are aimed at financing such activities that will give the company a profit greater than the cost of paying interest on the loan, the level of profitability of the company's equity will increase. It follows that in this situation, attracting borrowed funds is advisable. But if the return on assets turns out to be less than the cost of borrowed capital, the return on equity will decrease accordingly. It follows that in this situation, attracting borrowed capital will have an adverse effect on financial position companies.

The effect of financial leverage is calculated using the following formula:

EGF = (1 - Cn) H (KR - %cr) H ZK/SK, where:

EFR - effect of financial leverage, %;

Сн -- income tax rate;

ERA - economic return on assets;

%kr - interest on the loan;

ZK - borrowed capital;

SK -- equity

This formula has three elements:

(1-Сн) - tax corrector;

(ERA - %cr) - differential;

ZK/SC - financial leverage (financial leverage)

Let's consider the first element of the formula - “(1-Сн)”, which is called “tax corrector”. It makes it possible to see to what extent the effect of financial leverage is manifested depending on different levels of income taxation. A tax adjustment when using borrowed funds arises because the amount of financial costs reduces the tax base for income tax.

The next element of the EFR formula is the financial leverage differential “(ERA - %cr)”. It shows the difference between the economic return on assets and the average calculated interest rate on borrowed funds. The financial leverage differential characterizes the boundaries of a safe increase in financial leverage for which the economic effect from the use of assets exceeds the amount of financial costs.

The third component of the formula is the financial leverage “ZK/SK”. This element characterizes the structure of financing sources, that is, the ability of borrowed capital to influence the company’s profit. By highlighting the above elements, a company can specifically manage the effect financial leverage in the course of economic activity.

Based on this, two conclusions can be drawn:

The efficiency of using borrowed capital depends on the relationship between return on assets and the interest rate for the loan. If the loan rate is higher than the return on assets, the use of borrowed capital is unprofitable.

Other things being equal, greater financial leverage produces a greater effect.

There are several reasons why capital structure needs to be managed:

a) If the company attracts cheaper sources of financing, then profitability can increase significantly and compensate for the risks that have arisen.

b) By combining various elements of capital, a company can increase its market value and investment attractiveness.

Finding a rational balance between various sources of financing (that is, between debt and equity) is the main goal of managing the capital structure.

The optimal capital structure is a compromise between the maximum possible tax savings (when using borrowed sources of financing) and additional costs that arise with an increase in the share of borrowed capital.

The main point of using the effect of financial leverage is that it becomes possible to direct borrowed funds to those projects that could bring greater profits and compensate for the costs associated with attracting borrowed capital. For example, a company, having spent a smaller amount of money paying for interest on a loan, will be able to get a high profit on the invested funds. In simple words borrowed capital will work and bring great benefits, covering certain costs associated with its attraction. Of course, this does not always happen; you need to take into account the economic situation on the market and the profitability of the enterprise itself. At any moment, a situation may arise that the company will not be able to pay for the loans, this may have a detrimental effect on its reputation or even lead to bankruptcy.

The leverage effect sets the limit economic feasibility attracting borrowed funds. That is, using this indicator, you can determine the optimal ratio of capital elements at which profit will increase. You can also add that the effect of financial leverage shows a change in profitability equity through the use of borrowed funds. EGF can be both positive and negative. Therefore, the company must also take into account the likelihood of a negative effect when the cost of borrowed funds exceeds economic profitability.

EGF is a fairly dynamic indicator that requires constant monitoring in the process of managing the effect of financial leverage. Debt financing costs may increase significantly during periods of deteriorating market conditions. Therefore, there is a need to timely identify negative market conditions. The generally accepted value of the financial leverage effect is 3050% of the level of return on assets.

Any company strives to increase its market share. In the process of formation and development, the company creates and increases its own capital. At the same time, very often in order to jumpstart growth or launch new directions, it is necessary to attract external capital. For modern economy With a well-developed banking sector and exchange structures, accessing debt capital is not difficult.

Capital Balance Theory

When attracting borrowed funds, it is important to maintain a balance between the repayment obligations undertaken and the goals set. By violating it, you can get a significant decrease in the pace of development and a deterioration in all indicators.

According to the Modigliani-Miller theory, the presence of a certain percentage of debt capital in the structure of the total capital that a company has is beneficial for the current and future development of the company. Borrowed funds at an affordable service price allow you to use them for promising directions, in this case, the money multiplier effect will work, when one invested unit will give an increase in an additional unit.

But if there is a high share of borrowed funds, the company may fail to fulfill its both internal and external obligations due to an increase in the amount of loan servicing.

Thus, the main task of a company attracting third-party capital is to calculate the optimal financial leverage ratio and create balance in the overall capital structure. It is very important.

Financial leverage (leverage), definition

Leverage represents the existing ratio between two capitals in the company: own and attracted. For better understanding, the definition can be formulated differently. The financial leverage ratio is an indicator of the risk that a company assumes by creating a certain structure of financing sources, that is, using both its own and borrowed funds.

For understanding: the word “leverage” is an English word that means “leverage” in translation, therefore the leverage of financial leverage is often called “financial leverage”. It is important to understand this and not think that these words are different.

Shoulder Components

The financial leverage ratio takes into account several components that will influence its indicator and effects. Among them are:

1. Taxes, namely the tax burden that a company bears when carrying out its activities. Tax rates are set by the state, so a company on this issue can regulate the level of tax deductions only by changing the selected tax regimes.
2. Financial leverage indicator. This is the debt to equity ratio. This indicator alone can give an initial idea of ​​the price of attracted capital.
3. Financial leverage differential. Also a compliance indicator, which is based on the difference in the profitability of assets and the interest paid for loans taken.

Financial leverage formula

You can calculate the financial leverage ratio, the formula of which is quite simple, as follows.

Leverage = Amount of debt capital / Amount of equity capital

At first glance, everything is clear and simple. The formula shows that the leverage ratio is the ratio of all borrowed funds to equity capital.

Leverage, effects

Leverage (financial) is associated with borrowed funds, which are aimed at developing the company, and profitability. Having determined the capital structure and obtained the ratio, that is, by calculating the financial leverage ratio, the formula for which is presented on the balance sheet, you can assess the efficiency of capital (that is, its profitability).

The leverage effect gives an understanding of how much the efficiency of equity capital will change due to the fact that external capital has been attracted into the company’s turnover. To calculate the effect, there is an additional formula that takes into account the indicator calculated above.

There are positive and negative effects of financial leverage.

The first is when the difference between the return on total capital after all taxes have been paid exceeds the interest rate for the loan provided. If the effect is greater than zero, that is, positive, then increasing leverage is profitable and you can attract additional borrowed capital.

If the effect has a negative sign, then measures should be taken to prevent losses.

American and European interpretations of the leverage effect

Two interpretations of the leverage effect are based on which accents are taken into account to a greater extent in the calculation. This is a more in-depth look at how the financial leverage ratio shows the magnitude of the impact on a company's financial results.

The American model or concept considers financial leverage through net profit and profit received after the company has made all tax payments. This model takes into account the tax component.

The European concept is based on the efficiency of using borrowed capital. It examines the effects of using equity capital and compares them with the effect of using debt capital. In other words, the concept is based on assessing the profitability of each type of capital.

Conclusion

Any company strives, at a minimum, to achieve a break-even point, and, at a maximum, to obtain high performance profitability. There is not always enough equity capital to achieve all the goals set. Many companies resort to borrowing funds for development. It is important to maintain a balance between your own capital and attracted capital. It is to determine how well this balance is maintained at the current time that the financial leverage indicator is used. It helps determine how much the current capital structure allows for additional debt.

Ural Socio-Economic Institute

Academy of Labor and Social Relations

Department of Financial Management

Course work

Course: Financial management

Topic: The effect of financial leverage: financial and economic content, calculation methods and scope of application in making management decisions.

Form of study: Correspondence

Specialty: Finance and credit

Course: 3, Group: FSZ-302B

Completed by: Mingaleev Dmitry Rafailovich

Chelyabinsk 2009

Introduction

1. The essence of the financial leverage effect and calculation methods

1.1 The first method of calculating financial leverage

1.2 The second method of calculating financial leverage

1.3 The third method of calculating financial leverage

2. The combined effect of operating and financial leverage

3. The power of financial leverage in Russia

3.1 Controllable factors

3.2 Business size matters

3.3 Structure external factors, affecting the effect of financial leverage

Conclusion

Bibliography

Introduction

Profit is the simplest and at the same time the most complex economic category. It received new content in modern conditions economic development country, the formation of real independence of business entities. Being the main one driving force market economy, it ensures the interests of the state, owners and personnel of the enterprise. Therefore, one of the urgent tasks modern stage is the mastery by executives and financial managers of modern methods of effective management of profit generation in the process of production, investment and financial activities of the enterprise. The creation and operation of any enterprise is simply a process of investing financial resources on a long-term basis in order to make a profit. The priority is the rule that both own and borrowed funds must provide a return in the form of profit. Competent, effective management profit generation involves the construction at the enterprise of appropriate organizational and methodological systems to ensure this management, knowledge of the basic mechanisms of profit generation, the use modern methods its analysis and planning. One of the main mechanisms for achieving this task is financial leverage.

The purpose of this work is to study the essence of the financial leverage effect.

The tasks include:

· consider the financial and economic content

· consider calculation methods

· consider the scope of application

1. The essence of the financial leverage effect and calculation methods

Managing profit generation involves the use of appropriate organizational and methodological systems, knowledge of the basic mechanisms of profit generation and modern methods of its analysis and planning. When using a bank loan or issuing debt securities, interest rates and the amount of debt remain constant during the term of the loan agreement or the circulation period of the securities. The costs associated with debt servicing do not depend on the volume of production and sales of products, but directly affect the amount of profit remaining at the disposal of the enterprise. Since interest on bank loans and debt securities is considered a business expense (operating expense), using debt as a source of financing is less expensive for a business than other sources that are paid out of net income (for example, stock dividends). However, an increase in the share of borrowed funds in the capital structure increases the risk of insolvency of the enterprise. This should be taken into account when choosing funding sources. It is necessary to determine the rational combination between own and borrowed funds and the degree of its influence on the profit of the enterprise. One of the main mechanisms for achieving this goal is financial leverage.

Financial leverage) characterizes the enterprise's use of borrowed funds, which affects the value of return on equity. Financial leverage is an objective factor that arises with the appearance of borrowed funds in the amount of capital used by an enterprise, allowing it to obtain additional profit on its own capital.

The idea of ​​financial leverage American concept consists in assessing the level of risk based on fluctuations in net profit caused by the constant value of the enterprise’s costs of servicing debt. Its effect is manifested in the fact that any change in operating profit (earnings before interest and taxes) generates a more significant change in net profit. Quantitatively, this dependence is characterized by the indicator of the strength of influence of financial leverage (SVFR):

Interpretation of the leverage ratio: it shows how many times earnings before interest and taxes exceed net income. Lower limit coefficient is one. The greater the relative volume of borrowed funds attracted by an enterprise, the greater the amount of interest paid on them, the higher the power of financial leverage, and the more variable the net profit. Thus, an increase in the share of borrowed financial resources in the total amount of long-term sources of funds, which by definition is equivalent to an increase in the power of financial leverage, ceteris paribus, leads to greater financial instability, expressed in less predictability of net profit. Since the payment of interest, unlike, for example, the payment of dividends, is mandatory, then with a relatively high level financial leverage, even a slight decrease in the profit received can have unfavorable consequences compared to the situation when the level of financial leverage is low.

The higher the impact of financial leverage, the more non-linear the relationship between net profit and profit before interest and taxes becomes. A slight change (increase or decrease) in earnings before interest and taxes under conditions of high financial leverage can lead to a significant change in net income.

An increase in financial leverage is accompanied by an increase in the degree of financial risk of the enterprise associated with a possible lack of funds to pay interest on loans. For two enterprises having the same production volume, but different levels financial leverage, the variation in net profit due to changes in production volume is not the same - it is greater for an enterprise that has a higher level of financial leverage.

European concept of financial leverage characterized by an indicator of the effect of financial leverage, reflecting the level of additionally generated profit on equity capital at different proportions of the use of borrowed funds. This method of calculation is widely used in the countries of continental Europe (France, Germany, etc.).

Financial leverage effect(EFF) shows by what percentage the return on equity capital increases due to the attraction of borrowed funds into the turnover of the enterprise and is calculated using the formula:

EGF =(1-Np)*(Ra-Tszk)*ZK/SK

where N p is the income tax rate, in fractions of units;

Рп - return on assets (the ratio of the amount of profit before interest and taxes to the average annual amount of assets), in fractions of units;

C зк - weighted average price of borrowed capital, in fractions of units;

ZK - average annual cost of borrowed capital; SC - average annual cost of equity capital.

The above formula for calculating the effect of financial leverage has three components:

♦ tax corrector of financial leverage(l-Нп), which shows to what extent the effect of financial leverage is manifested in connection with different levels of profit taxation;

♦ leverage differential(p a -Ts, k), characterizing the difference between the profitability of the enterprise’s assets and the weighted average calculated interest rate on loans and borrowings;

♦ financial leverage ZK/SK

the amount of borrowed capital per ruble of the enterprise's equity capital. In conditions of inflation, the formation of the effect of financial leverage is proposed to be considered depending on the inflation rate. If the amount of debt of the enterprise and interest on loans and borrowings are not indexed, the effect of financial leverage increases, since debt servicing and the debt itself are paid with already depreciated money:

EGF=((1-Np)*(Ra – Tsk/1+i)*ZK/SK,

where i is a characteristic of inflation (inflationary rate of price growth), in fractions of units.

In the process of managing financial leverage, a tax corrector can be used in the following cases:

♦ if by various types differentiated tax rates have been established for the activities of the enterprise;

♦ if by certain species activities, the enterprise uses income tax benefits;

♦ if individual subsidiaries of the enterprise operate in free economic zones of their country, where preferential income taxation regimes apply, as well as in foreign countries.

In these cases, by influencing the sectoral or regional structure of production and, accordingly, the composition of profit according to the level of its taxation, it is possible, by reducing the average rate of profit taxation, to reduce the impact of the tax corrector of financial leverage on its effect (all other things being equal).

The financial leverage differential is a condition for the occurrence of the financial leverage effect. Positive EFR occurs in cases where the return on total capital (Ra) exceeds the weighted average price of borrowed resources (TZK)

Suppose there are two enterprises with similar levels of economic profitability and the same value of assets. However, the first enterprise uses only its own funds as sources of financing, while the second uses its own and borrowed funds.

A situation arises in which, despite the same economic profitability, due to differences in the financing structure, different meanings return on equity (ROC). This difference in these performance indicators of two organizations is called the “financial leverage effect.”

How sources of financing activities affect profitability

The financial leverage effect (FLE) is an increase in the return on equity that occurs as a result of the use of loans, despite their payment. This leads to two conclusions:

1) An enterprise that uses only its own funds in its activities, without resorting to the services of credit institutions, keeps their profitability within the value of RCC = (1-T)*ER, where T is the value interest rate income tax.

2) An enterprise that uses funds received on credit to carry out its activities changes the RSS - increases or decreases it depending on the interest rate and the ratio of shares of borrowed and equity funds. IN similar situations and a phenomenon called the financial leverage effect arises.

RSS=(1-T)*ER+EGF

To determine the value of the EFR, it is necessary to find the value of an indicator called the average interest rate (ASRP). This indicator is found as the ratio of existing financial costs for credit funds to the total amount of funds borrowed by the enterprise.

Components of the financial leverage effect

The effect of financial leverage is formed by two components:

1. Differential: (1-T)*(ER-SRSP).

2. Leverage of financial leverage, which is the ratio of borrowed funds to equity.

The formula for calculating the EGF is determined by the product of these two components.

Basic Rules

1. The effect of financial leverage shows whether a loan will be beneficial for the enterprise. A positive value of the EGF indicator means that raising borrowed funds will be beneficial for the organization and expedient.

2. Attracting an additional loan increases the value of the financial leverage indicator; accordingly, the risk of non-repayment of borrowed funds also increases. This is compensated by increasing interest rates on loans. Consequently, the average interest rate also increases.

3. The effect of financial leverage also determines whether the enterprise has the ability to attract additional credit funds in an emergency. To do this, you need to monitor the value of one of its components - the differential. The differential must be positive, and a certain margin of safety in this indicator must be maintained.