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Understanding Leverage and Its Types in Capital Structure Analysis

Leverage involves the use of fixed costs to increase profits relative to changes in sales. This concept is crucial in analyzing how debt and equity impact shareholder returns and risks in a firm's capital structure. The types of leverage include Operating Leverage, Financial Leverage, and Combined Leverage, each playing a unique role in amplifying returns and risks. Operating leverage focuses on fixed operating costs' impact on profit changes, measured through the degree of operating leverage (DOL). It influences the break-even point, selling price, and variable costs, linking directly to business risk.

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Understanding Leverage and Its Types in Capital Structure Analysis

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