The study and measurement of financial leverage irrelevant.

The degree of Financial leverage measures the percentage of change in EPS to the percentage change in EBIT. This can be calculated by using the following formula: Degree of Financial Leverage = Percentage change in EPS ⁄ Percentage change in EBIT OR Degree of Financial leverage = EBIT ⁄ EBIT - Interest Where - EBIT - Earnings before Interest and tax EPS - Earnings per share I - Interest According to Gitman, Financial leverage is "the ability of a firm to use fixed financial charges to magnify the effects of changes in EBIT on firm's earnings per share". In other words, financial leverage involves the use of funds obtained at a fixed cost in the hope of increasing the return to the equity shareholders. Financial leverage locates the correct profitable financial decision regarding capital structure of the company. Financial leverage is thus one of the important devices which is used to measure the fixed cost proportion with the total capital of the company. If the firm acquires fixed cost funds at a higher cost, then the earnings from those assets, the earning per share and return on equity capital will decrease.