Degree of * Leverage

Within Corporate Finance, there is a focus area where management optimize their cost structure. There are several key measurement to identify business risk under the name of leverage. They use the term elasticity of one percent change in one variable with regard to unit percentage change in another variable. The most commonly used degree of operating leverage and degree of financial leverage.

Attached is a screenshot of how I derived the equation based on the definition.

Screen Shot 2018-08-19 at 7.54.02 PM

In the end, the term degree of total leverage is defined as %change in net income over %change in units sold. Once should reach to the conclusion easily that DTL = DOL * DFL

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