Study of Managerial Decision Making Linked to Operating and Financial Leverage

Abstract

In this paper, we as researchers try to quantify the effect of Operating Income or Earning Before Income and Taxes (EBIT) on individual listed firm on stock market and we study simultaneously the effects of Earning Per Share (EPS) on shareholder wealth.

Furthermore, we tried to build up hypothetically an optimal capital structure firm that uses an appropriate combination of Equity as well as Debt.

Rate of Interest and Tax are based on assumptions keeping in mind the present economic conditions of USA (assumed).

We have studied in detail about Operating and Financial Leverages and thus further explained Degree of Operating Leverage (DOOL) as well as Degree of Financial Leverage (DOFL).

In our study, initially we try to give a conceptual framework of the Leveraged Firm by taking hypothetical statistics and then in conclusion part Managerial Role and decision-making is discussed.

During our study, intense literature review and genuine hypothetical figures fitted to present economic conditions of Tax Rate and Interest Rates done in order to link with managerial decision making in levered companies.