Financial leverage is calculated as a ratio. financial leverage

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, it is very often necessary to attract external capital to boost growth or launch new areas. For a modern economy with a well-developed banking sector and exchange structures, it is not difficult to get access to borrowed capital.

Theory about the balance of capital

When attracting borrowed funds, it is important to strike a balance between the commitments made to repay and the goals set. Violating it, you can get a significant decrease in the pace of development and the deterioration of all indicators.

According to the Modigliani-Miller theory, the presence of a certain percentage of borrowed 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 acceptable service price allow them to be directed to promising areas, in this case, the money multiplier effect will work when one invested unit gives an increase in an additional unit.

But in the presence of a high proportion of borrowed funds, the company may not meet its internal and external obligations by increasing the amount of loan servicing.

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

Financial leverage (lever), definition

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

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

Components of the "shoulder"

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

Taxes, namely the tax burden that the company bears in carrying out its activities. Tax rates are set by the state, so the company on this issue can regulate the level of tax deductions only by changing the selected tax regimes.
Indicator of financial leverage. This is the ratio of borrowed funds to equity. Already this indicator can give an initial idea of the price of capital raised.
Financial leverage differential. Also an indicator of compliance, which is based on the difference between the profitability of assets and the interest that is paid for loans taken.

Financial Leverage Formula

Calculate the coefficient of financial leverage, the formula of which is quite simple, as follows.

Leverage = Amount of borrowed capital / Amount equity

At first glance, everything is clear and simple. It can be seen from the formula that the leverage ratio of financial leverage is the ratio of all borrowed funds to equity capital.

Shoulder of financial leverage, effects

Leverage (financial) is associated with borrowed funds, which are aimed at the development of the company, and profitability. Having determined the capital structure and obtained the ratio, that is, by calculating the coefficient of financial leverage, the formula for the balance sheet of which is presented, one can evaluate the effectiveness 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 to 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 it is profitable to increase the leverage and it is possible to attract additional borrowed capital.

If the effect has a minus sign, then measures should be taken to prevent a loss.

American and European interpretations of the leverage effect

The two interpretations of the leverage effect are based on which accents are more taken into account in the calculation. This is a more in-depth consideration of how the financial leverage ratio shows the magnitude of the impact on the company's financial results.

The American model or concept considers financial leverage through net profit and profit received after the company has completed 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 it with the effect of using borrowed capital. In other words, the concept is based on assessing the profitability of each type of capital.

Conclusion

Any firm strives at least to achieve the break-even point, and as a maximum - to obtain high performance profitability. To achieve all the goals, there is not always enough own capital. A lot of companies resort to attracting borrowed funds for development. It is important to maintain a balance between own capital and borrowed capital. It is to determine how this balance is observed in the current time, and the indicator of financial leverage is used. It helps to determine how much the current capital structure allows you to work with additional borrowed funds.

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 in making managerial 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 effect of financial leverage and calculation methods

1.1 The first way to calculate financial leverage

1.2 The second method of calculating financial leverage

1.3 The third method of calculating financial leverage

2. Coupled effect of operational and financial leverage

3. Strength of financial leverage in Russia

3.1 Controllable factors

3.2 Business size matters

3.3 Structure of external factors influencing the effect of financial leverage

Conclusion

Bibliography

Introduction

Profit is the simplest and at the same time the most complex economic category. It received a new content in the conditions of the modern economic development of the country, the formation of real independence of business entities. Being the main driving force of the 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 of managers and financial managers with modern methods of effective management of profit formation in the process of production, investment and financial activities of the enterprise. The creation and operation of any enterprise is simply an investment process financial resources on the long term for the purpose of making a profit. Of priority importance is the rule that both own and borrowed funds must provide a return in the form of profit. Competent, effective management of profit formation provides for the construction at the enterprise of appropriate organizational and methodological systems for ensuring this management, knowledge of the main mechanisms for profit formation, the use modern methods its analysis and planning. One of the main mechanisms for the implementation of this task is the financial lever

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

Tasks include:

Consider the financial and economic content

Consider calculation methods

Consider the scope

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

Profit formation management involves the use of appropriate organizational and methodological systems, knowledge of the main mechanisms of profit formation 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 term of circulation of securities. The costs associated with servicing the debt 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 charged to enterprises (operating expenses), using debt as a source of financing is cheaper for the enterprise than other sources that are paid out of net profit (for example, dividends on shares). 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 impact on the profit of the enterprise. One of the main mechanisms for achieving this goal is financial leverage.

Financial leverage (leverage) characterizes the use of borrowed funds by the enterprise, which affects the value of return on equity. Financial leverage is an objective factor that arises with the advent of borrowed funds in the amount of capital used by the enterprise, allowing it to receive additional profit on equity.

The idea of financial leverage American concept consists in assessing the level of risk for fluctuations in net profit caused by the constant value of the company's debt service costs. Its action is manifested in the fact that any change in operating profit (earnings before interest and taxes) generates a more significant change in net income. Quantitatively, this dependence is characterized by the indicator of the strength of the impact of financial leverage (SVFR):

Interpretation of the financial leverage ratio: it shows how many times earnings before interest and taxes exceed net income. The lower limit of the coefficient is one. The greater the relative amount of borrowed funds attracted by the enterprise, the greater the amount of interest paid on them, the higher the impact of financial leverage, 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 force of financial leverage, ceteris paribus, leads to greater financial instability, expressed in less predictable net profit. Since the payment of interest, in contrast to, for example, the payment of dividends, is mandatory, then with a relatively high level of financial leverage, even a slight decrease in profits may have adverse consequences compared to a situation where the level of financial leverage is low.

The higher the force of financial leverage, the more non-linear the relationship between net income and earnings 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.

The 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 and borrowings. For two enterprises with the same volume of production, but different levels of financial leverage, the variation in net profit due to changes in the volume of production is not the same - it is greater for the enterprise with a higher value of the 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 with a different share of the use of borrowed funds. This method of calculation is widely used in the countries of continental Europe (France, Germany, etc.).

The effect of financial leverage(EFF) shows by what percentage the return on equity increases by attracting borrowed funds into the turnover of the enterprise and is calculated by the formula:

EGF \u003d (1-Np) * (Ra-Tszk) * ZK / SK

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

Rp - 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 zk - weighted average price of borrowed capital, in fractions of units;

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

There are three components in the above formula for calculating the effect of financial leverage:

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

♦ leverage differential(ra -C, k), which characterizes 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 company's own capital. In terms of inflation, the formation of the effect of financial leverage is proposed to be considered depending on the rate of inflation. If the amount of the company's debt and interest on loans and borrowings are not indexed, the effect of financial leverage increases, since debt servicing and the debt itself are paid for with already depreciated money:

EGF \u003d ((1-Np) * (Ra - Tsk / 1 + i) * ZK / SK,

where i - 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 activities of the enterprise differentiated tax rates are established;

♦ if the enterprise uses income tax benefits for certain types of activities;

♦ if individual subsidiaries of the enterprise operate in the free economic zones of their country, where there is a preferential income tax regime, as well as in foreign countries.

In these cases, by influencing the sectoral or regional structure of production and, accordingly, the composition of profit in terms of its taxation level, it is possible, by reducing the average profit tax rate, to reduce the impact of the financial leverage tax corrector on its effect (ceteris paribus).

The financial leverage differential is a condition for the emergence of the effect of financial leverage. A positive EGF occurs in cases where the return on total capital (Ra) exceeds the weighted average price of borrowed resources (Czk)

The difference between the return on total capital and the cost of borrowed funds will increase the return on equity. Under such conditions, it is beneficial to increase the financial leverage, i.e. the share of borrowed funds in the capital structure of the enterprise. If R a< Ц зк, создается отрицательный ЭФР, в результате чего происходит уменьшение рентабельности собственного капитала, что в конечном итоге может стать причиной банкротства предприятия.

The higher the positive value of the differential of financial leverage, the higher, other things being equal, its effect.

Due to the high dynamism of this indicator, it requires constant monitoring in the process of profit management. This dynamism is driven by a number of factors:

♦ in the period of deterioration of the financial market (decrease in the supply of loan capital) the cost of raising borrowed funds may increase sharply, exceeding the level of accounting profit generated by the company's assets;

♦ decline financial stability in the process of intensive attraction of borrowed capital leads to an increase in the risk of its bankruptcy, which forces lenders to raise interest rates for a loan, taking into account the inclusion of a premium for an additional financial risk. As a result, the financial leverage differential can be reduced to zero or even to a negative value. As a result, the return on equity will decrease, as part of the profit it generates will be directed to servicing debt at high interest rates;

♦ in addition, in the period of deterioration of the situation on the commodity market and reduction in sales, the amount of accounting profit also falls. Under such conditions, a negative value of the differential can form even with stable interest rates due to a decrease in the return on assets.

It can be concluded that the negative value of the financial leverage differential for any of the above reasons leads to a decrease in the return on equity, the use of borrowed capital by an enterprise has a negative effect.

Financial Leverage characterizes the strength of the impact of financial leverage. This coefficient multiplies the positive or negative effect obtained due to the differential. With a positive value of the differential, any increase in the coefficient of financial leverage causes an even greater increase in its effect and return on equity, and with a negative value of the differential, an increase in the coefficient of financial leverage leads to an even greater decrease in its effect and return on equity.

Thus, with a constant differential, the coefficient of financial leverage is the main generator of both the increase in the amount and level of return on equity, and the financial risk of losing this profit.

Knowledge of the mechanism of the impact of financial leverage on the level of financial risk and profitability of equity capital allows you to purposefully manage both the cost and the capital structure of the enterprise.

1.1 The first way to calculate financial leverage

The essence of financial leverage is manifested in the impact of debt on the profitability of the enterprise.

As mentioned above, the grouping of expenses in the income statement into production and financial expenses allows us to identify two main groups of factors affecting profit:

1) the volume, structure and efficiency of managing the costs associated with the financing of current and non-current assets;

2) the volume, structure and cost of funding sources [enterprise funds.

Based on the profit indicators, the profitability indicators of the enterprise are calculated. Thus, the volume, structure and cost of funding sources affect the profitability of the enterprise.

Enterprises resort to various sources of financing, including through the placement of shares or the attraction of loans and borrowings. attraction share capital is not limited by any timeframe, therefore, the joint-stock company considers the attracted funds of shareholders to be its own capital.

attraction Money through loans and borrowings is limited to certain periods. However, their use helps to maintain control over the management of a joint stock company, which can be lost due to the emergence of new shareholders.

An enterprise can operate by financing its expenses only from its own capital, but no enterprise can operate only on borrowed funds. As a rule, the enterprise uses both sources, the ratio between which forms the structure of the liability. The structure of liabilities is called the financial structure, the structure of long-term liabilities is called the capital structure. So the capital structure is integral part financial structure. Long-term liabilities that make up the capital structure and include equity and a share of term debt capital are called permanent capital

Capital structure= financial structure - short-term debt = long-term liabilities (fixed capital)

When forming the financial structure (the structure of liabilities in general), it is important to determine:

1) the ratio between long-term and short-term borrowed funds;

2) the share of each of the long-term sources (own and borrowed capital) as a result of liabilities.

The use of borrowed funds as a source of asset financing creates the effect of financial leverage.

The effect of financial leverage: the use of long-term borrowed funds, despite their payment, leads to an increase in the return on equity.

Recall that the profitability of an enterprise is assessed using profitability ratios, including sales profitability ratios, asset profitability (profit/asset) and equity return (profit/equity).

The relationship between the return on equity and the return on assets indicates the importance of the company's debt.

Return on equity ratio (in the case of using borrowed funds) = profit - interest on debt repayment debt capital / equity capital

We remind you that the cost of debt can be expressed in relative and absolute terms, i.e. directly in interest accrued on a loan or loan, and in monetary terms - the amount of interest payments, which is calculated by multiplying the remaining amount of debt by the interest rate reduced to the period of use.

Return on assets ratio- profit/assets

Let's transform this formula to get the profit value:

assets

Assets can be expressed in terms of the value of their funding sources, i.e. through long-term liabilities (the sum of own and borrowed capital):

Assets = equity+ borrowed capital

Substitute the resulting expression of assets into the profit formula:

Profit = return on assets(own capital + debt capital)

And finally, we substitute the resulting expression of profit into the previously converted formula for return on equity:

Return on equity = return on assets (equity+ borrowed capital) - interest on debt repayment borrowed capital / equity capital

Return on equity= return on assets equity + return on assets debt capital - interest on debt repayment debt capital / equity capital

Return on equity = return on assets equity + borrowed capital (return on assets - interest on debt repayment) / equity

Thus, the value of the return on equity ratio increases with the growth of debt as long as the value of the return on assets is higher than the interest rate on long-term borrowed funds. This phenomenon has been named effect of financial leverage.

An enterprise that finances its activities only from its own funds, the return on equity is approximately 2/3 of the return on assets; an enterprise using borrowed funds has 2/3 of the return on assets plus the effect of financial leverage. At the same time, the return on equity increases or decreases depending on the change in the capital structure (the ratio of own and long-term borrowed funds) and the interest rate, which is the cost of attracting long-term borrowed funds. This manifests itself financial leverage.

Quantitative assessment of the impact of financial leverage is carried out using the following formula:

Strength of financial leverage = 2/3 (return on assets - interest rate on loans and borrowings)(long-term debt / equity)

It follows from the above formula that the effect of financial leverage occurs when there is a discrepancy between the return on assets and the interest rate, which is the price (cost) of long-term borrowed funds. In this case, the annual interest rate is reduced to the period of use of the loan and is called the average interest rate.

Average interest rate- the amount of interest on all long-term credits and loans for the analyzed period / total amount attracted credits and loans in the analyzed period 100%

The formula for the effect of financial leverage includes two main indicators:

1) the difference between the return on assets and the average interest rate, called the differential;

2) the ratio of long-term debt and equity, called the leverage.

Based on this, the formula for the effect of financial leverage can be written as follows.

Strength of financial leverage = 2/3 of the differentiallever arm

After taxes are paid, 2/3 of the differential remains. The formula for the impact of financial leverage, taking into account taxes paid, can be represented as follows:

(1 - profit tax rate) 2/3 differential * leverage

It is possible to increase the profitability of own funds through new borrowings only by controlling the state of the differential, the value of which can be:

1) positive if the return on assets is higher than the average interest rate (the effect of financial leverage is positive);

2) zero, if the return on assets is equal to the average interest rate (the effect of financial leverage is zero);

3) negative, if the return on assets is below the average interest rate (the effect of financial leverage is negative).

Thus, the value of the return on equity will increase as borrowed funds increase until the average interest rate becomes equal to the value of the return on assets. At the moment of equality of the average interest rate and the return on assets, the leverage effect will “turn over”, and with a further increase in borrowed funds, instead of increasing profits and increasing profitability, there will be real losses and unprofitability of the enterprise.

Like any other indicator, the level of financial leverage effect should have an optimal value. It is believed that the optimal level is 1/3-1/3 of the value of return on assets.

1.2 The second method of calculating financial leverage

By analogy with the production (operational) leverage, the impact of financial leverage can be defined as the ratio of the rate of change in net and gross profit.

= rate of change in net profit / rate of change in gross profit

In this case, the strength of the impact of financial leverage implies the degree of sensitivity of net profit to changes in gross profit.

1.3 The third method of calculating financial leverage

Leverage can also be defined as the percentage change in net income per ordinary share outstanding due to a change in the net operating result of the investment (earnings before interest and taxes).

The power of financial leverage= percentage change in net income per common share outstanding / percentage change in net investment operating result

Consider the indicators included in the formula of financial leverage.

The concept of earnings per ordinary share in circulation.

Net income ratio per share outstanding = net income - amount of dividends on preferred shares / number of ordinary shares outstanding

Number of common shares outstanding = total number of common shares outstanding - treasury common shares in the company's portfolio

Recall that the earnings per share ratio is one of the most important indicators affecting market value company shares. However, it must be remembered that:

1) profit is an object of manipulation and, depending on the methods used accounting can be artificially overestimated (FIFO method) or underestimated (LIFO method);

2) the immediate source of payment of dividends is not profit, but cash;

3) buying its own shares, the company reduces their number in circulation, and therefore increases the amount of profit per share.

The concept of the net result of the operation of the investment. Western financial management uses four main indicators that characterize the financial performance of an enterprise:

1) added value;

2) gross result of exploitation of investments;

3) net result of exploitation of investments;

4) return on assets.

1. Value Added (NA) represents the difference between the cost of goods produced and the cost of consumed raw materials, materials and services.

Value added - the value of manufactured products - the cost of consumed raw materials, materials and services

In its economic essence, added value. represents that part of the value of the social product which is newly created in the process of production. Another part of the value of the social product is the cost of raw materials, materials, electricity, labor, etc. used.

2. Gross Result of Exploitation of Investments (BREI) is the difference between value added and labor costs (direct and indirect). Overspending tax may also be deducted from the gross result wages.

Gross return on investment =value added - expenses (direct and indirect) for wages - tax on wage overruns

The gross result of investment exploitation (BREI) is an intermediate indicator of the financial performance of an enterprise, namely, an indicator of the sufficiency of funds to cover the costs taken into account in its calculation.

3. Net result of exploitation of investments (NREI) is the difference between the gross operating result of the investment and the cost of restoring fixed assets. In its economic essence, the gross result of the exploitation of investments is nothing more than profit before interest and taxes. In practice, the balance sheet profit is often taken as the net result of the operation of investments, which is wrong, since the balance sheet profit (profit transferred to the balance sheet) is profit after paying not only interest and taxes, but also dividends.

Net result of exploitation of investments= gross result of operating the investment - the cost of restoring fixed assets (depreciation)

4. Return on assets (RA). Profitability is the ratio of the result to the funds spent. Return on assets refers to the ratio of profit to

payment of interest and taxes on assets - funds spent on production.

Return on assets= (net operating result of investments / assets) 100%

Transforming the formula for return on assets will allow you to obtain formulas for the profitability of sales and asset turnover. To do this, we use a simple mathematical rule: multiplying the numerator and denominator of a fraction by the same number will not change the value of the fraction. Multiply the numerator and denominator of the fraction (return on assets) by the volume of sales and divide the resulting figure into two fractions:

Return on assets= (net result of investment operation sales volume / assets sales volume) 100%= (net result of investment operation / sales volume) (sales volume / assets) 100%

The resulting formula for return on assets as a whole is called the Dupont formula. The indicators included in this formula have their names and their meaning.

The ratio of the net result of the operation of investments to the volume of sales is called commercial margin. In essence, this coefficient is nothing but the coefficient of profitability of the implementation.

The indicator "sales volume / assets" is called the transformation ratio, in essence, this ratio is nothing more than the asset turnover ratio.

Thus, the regulation of the return on assets is reduced to the regulation of the commercial margin (sales profitability) and the transformation ratio (asset turnover).

But back to financial leverage. Let us substitute the formulas for net profit per ordinary share in circulation and the net result of the operation of investments into the formula for the strength of financial leverage

Strength of financial leverage = percentage change in net income per ordinary share outstanding / percentage change in net investment operating result = (net income - preferred dividends / number of ordinary shares outstanding) / (net investment operating result / assets) 100%

This formula makes it possible to estimate by what percentage the net profit per one ordinary share in circulation will change if the net result of investment operation changes by one percent.

2. Coupled effect of operational and financial leverage

The effect of production (operational) leverage can be combined with the effect of financial leverage and obtain the conjugated effect of production (operational) and financial leverage, i.e. production-financial, or general, leverage.

At the same time, the effect of synergy is manifested, which consists in the fact that the value of the aggregate indicator is greater than the arithmetic sum of the values of individual indicators.

Thus, the value of the production-financial (general) leverage is greater than the arithmetic sum of the values of the production (operational) and financial leverage indicators.

Leverage as a measure of risk

Leverage is not only a method of asset management aimed at increasing profits, but also a measure of the risk associated with investments in the activities of the enterprise. At the same time, there are:

1) entrepreneurial risk, measured by the production (operational) leverage;

2) financial risk measured by financial leverage;

3) total risk, measured by the general (production-financial) leverage.

Financial leverage is not only a method of managing the profit and profitability of an enterprise, but also a measure of risk.

The greater the force of the impact of the financial lever, the greater, and, conversely, the smaller the force of the impact of the financial lever, the less:

1) for shareholders - the risk of a fall in the level of dividends and the share price;

2) for creditors - the risk of non-repayment of the loan and non-payment of interest.

Combining the actions of production (operational) I and financial levers means an increase in the overall risk, the risk associated with the enterprise. In this case, the effect of synergy is manifested, i.e. the value of the total risk is greater than the arithmetic sum of indicators of production (operational) and financial risks.

3. Strength of financial leverage in Russia

In the course of a large-scale study of the possibilities of domestic business in managing the capital structure, at the first stage, the question was investigated: do Russian companies manage their capital structure and are they aware, building appropriate financial strategies, of the financial risk that grows with an increase in borrowed capital? At the second stage, it was studied whether domestic business itself is a real subject of capital structure management and to what extent the effect of financial leverage depends on external factors?

Who determines the structure of capital in Russia - the domestic business itself or, perhaps, it spontaneously develops under the influence of external circumstances? It is obvious that businesses are trying to play in the financial market using different funding strategies. The differences in the implemented strategies are determined, first of all, by the scale of the business. In general, it can be stated that Russian companies and corporations have sufficiently mastered financial strategies, including capital structure management, but after 2003, the interests of large business focused on external borrowing, while small and medium-sized businesses maintained and strengthened their positions in domestic financial market.

The mechanisms for raising capital by large businesses differ from those available to medium and small businesses. If representatives of the former bring their financial assets to international stock exchanges and receive cheap loans from the largest European and American banks, then small businesses are content with very expensive loans from domestic banks. It looks like this: today big business and banks faced the liquidity crisis that began worldwide in the second half of 2007 and finally realized the growing financial risk. The price for underestimating the risk will apparently have to be paid by medium and small businesses, and, ultimately, by the population of Russia. Terms of long-term lending in the domestic financial market have tightened - the cost of loans after a long period of decline has risen sharply, the volumes have declined.

The observed differentiation of financial strategies, depending on the scale of domestic business entities, is associated with the degree of influence of factors on them. external environment. The more resistant a company is to external factors, the more independent it is in managing its capital structure. Therefore, to begin with, we determine which of the factors of external and internal environment domestic business can use (and really use) to increase the effect and strength of financial leverage.

3.1 Controllable factors

The EGF is positive if the leverage differential is positive, the return on the company's assets exceeds the cost of borrowed capital. The company can influence the value of the differential, but to a limited extent: on the one hand, increasing the efficiency of production (scale effect), and on the other hand, through access to sources of cheap borrowed capital. The financial leverage differential is an important informational impulse not only for business, but also for potential creditors, as it allows you to determine the risk of providing new loans to a company. The larger the differential, the lower the risk for the lender and vice versa. Large financial leverage means significant risk for both the borrower and the lender.

The magnitude of the impact of financial leverage quite accurately shows the degree of financial risk associated with the firm. The greater the share of costs in taxable income (before paying interest on servicing borrowed capital), the greater the impact of financial leverage and the higher the risk of default on the loan.

The financial risk generated by financial leverage consists of the risk of the company's return on assets falling below the cost of borrowed capital (the differential becomes negative) and the risk of reaching such a leverage value when the company is no longer able to service the borrowed capital (the borrower defaults).

Among the parameters influencing the EFR and SVFR, we single out those that companies can manage to some extent, and uncontrollable ones related to external factors. The parameter of return on assets can be attributed to the managed, although not to the full extent, since its value is determined by the qualifications of management, the ability of managers to use favorable market conditions for the benefit of the company, not only in the sale of products, but also by attracting external capital. average cost loan capital is also a manageable factor, albeit indirectly: the price and other parameters of the availability of loans for a company are largely determined by its credit rating, credit history, growth dynamics, and sometimes by scale and industry affiliation. Finally, the leverage of the financial lever, that is, the ratio of debt and equity capital (its structure) is determined by the company itself.

The parameters of the effect of financial leverage not controlled by companies include the income tax rate.

Is it possible, by varying these parameters, to increase the EGF? Does the size of the company's business affect its ability to manage, for example, return on assets?

It is obvious that the profitability of assets of companies supplying products for export, under favorable market conditions, is far from always the result of a single control action. Today, companies engaged in the extraction of fuel and energy and other minerals, the production of coke, oil products, chemical, metallurgical production and the production of finished metal products or providing communication services receive and consume rent in favorable market conditions. Almost all business in these areas of activity is represented by large and large corporations, often with solid state participation.

The exceptionally favorable market situation prevailing in the world markets contributes to the increase in the profitability of exporting companies not only when selling products, but also when attracting inexpensive capital in external financial markets. Indeed, until recently these corporations had access to external long-term loans at a rate of 6-7%, while in Russian banks the cost of loans is 2-2.5 times higher. It was often difficult for the largest Russian companies to refuse loans, as they were presented to them, one might say, on a silver platter: “Foreigners literally ran after Russian banks, primarily with state capital, offering them money ... There are many free money, and Russia remains an attractive country for investment - a solid trade surplus, a budget surplus, huge reserves, not too high inflation" 1

Finally, the possibilities of the largest corporations to manage the capital structure are maximum, since favorable market conditions, cheap borrowed capital, until some time, significantly reduced not only financial, but also general market risk for them.

3.2 Business size matters

Large Russian business has already lost the opportunity to refinance and build up new external debt. In this regard, there has been a significant increase in the number and scope of mergers and acquisitions in the financial sector.

But let's return to the calculation of the effect of financial leverage: the last of the above parameters that determine the effect and strength of the impact of financial leverage is income tax - a factor not controlled by business. It "works" in favor of domestic corporations, because, as the formula shows, the higher the tax rate, the lower the effect of financial leverage. Russia boasts one of the lowest income taxes in the world, the rate of which is 24%. Having gained access to cheap Western loans, the domestic big business "skimmed the cream" also in this direction.

Well, medium and small businesses, involuntarily remaining faithful to the domestic financial market, had to be content with the sources that this market offered. It must be admitted that the flow of "hot" Western money that spilled over into the Russian market contributed to a gradual reduction in the cost of domestic loans for corporations. The bank margin, which peaked in 2004, when the largest banks gained access to the external debt capital market, gradually decreased, as a result, the price of loans on the domestic market also decreased noticeably. It was during that period that the scale of mortgage lending to the population grew, housing construction. Cheaper, though still expensive compared to Western ones, domestic loans still found a use for themselves, working for Russia.

Medium business was looking and finding new ways to get cheaper debt capital. Thus, since 2003, the scale of borrowing through the issuance of corporate bonds by medium-sized companies has been noticeably expanding. Moreover, bonds were often placed by closed subscription, which, as you know, significantly reduces the issuer's costs for issuance. Really, closed way placement of bonds, practiced with a relatively small (but sufficient for medium-sized businesses) issue scale, on the one hand, provides the issuer not only with capital, but also with a good credit history for future possible IPOs, and on the other hand, allows him to receive borrowed capital at a cost lower than bank .

Why do private subscription participants settle for low returns? The fact is that those who are interested in the implementation of the invested project are involved in the closed subscription - suppliers of equipment, raw materials, buyers of products, local authorities, who are interested in the emergence of new jobs and the investment attractiveness of their city, district. Ultimately, in addition to profitability, subscription participants receive other benefits: suppliers of raw materials - a reliable market, buyers - a reliable supplier, and local authorities - new jobs, increased tax revenues, etc.

For small businesses, such sources of borrowed capital are practically inaccessible. Those companies that did not join government programs to support small businesses and did not get access to cheap loans through them had to attract expensive bank loans, look for partners with capital, turning them into co-owners, losing their independence, or go into the shadows and develop by reducing tax and extrabudgetary payments.

Does (and to what extent) financial risk affect the formation of financial strategies of entities of different scale Russian business? The minimum financial risk in favorable market conditions was borne by the largest corporations exporting raw materials and low value-added products, which gained access to cheap Western debt markets. But small and medium-sized businesses that borrowed in the domestic, more expensive market, also faced higher financial risk.

The same situation is observed with regard to domestic banks that have not been able to get access to cheap Western loans. Since the rates on interbank loans, although they were declining, but to a lesser extent than for banks of the first (6-7%) and second round (7-8%), medium and small domestic banks had to be content with a lower margin, which was established at the level of 8- nine%. Under the influence of the liquidity crisis, by the end of 2007 the rates on interbank credits rose again by 1.5-2%, less for the first-tier banks and more for the third-tier ones.

No less significant for domestic business entities are other internal factors that affect financial strategies in different ways. Without going into detail here, let's list them:

* the level of the required rate of return, profitability ("appetites" of companies are not the same, respectively, their financial strategies and risks differ);

* cost structure (level operating lever correlates with industry affiliation and depends on the capital intensity of the technologies used);

* industry affiliation of the company, its organizational and legal form, stage life cycle, age, place in the market, etc.

Because in an open economy, and Russian economy approaches its standards, the impact of the external environment on the company's activities is large, it can be assumed that external factors also affect the effect of financial leverage in a wider range of areas than internal ones, and therefore their influence may turn out to be greater. Factors external to business are such factors as the dynamics of the bank margin, the average market value of bank loans and non-bank sources for the corporate sector.

Taking into account the changes in the external environment brought by the state policy to various sectors of the economy, we will expand the list of considered internal and external factors that affect the effect of financial leverage and the strength of its impact. Let us focus on those environmental factors that are regulated by the market and the state.

3.3 Structure of external factors influencing the effect of financial leverage

Impact indicators on financial behavior companies of external factors that cause an increase or decrease in the effect of financial leverage, we will consider changes in government policy and market conditions that are taking shape in world markets. The influence of market conditions on the world markets for raw materials, metals and other low-added products, as well as on financial markets by the end of 2007 has already been largely considered. Let us just add that the volatility of the ruble exchange rates and the main currencies used for international settlements also noticeably change the financial behavior of Russian companies and banks, primarily those with access to foreign markets.

Exchange rate and interest rates

The peculiarity of the current situation is that in the last two years the exchange rate of the US dollar, which is still the main currency of international settlements, has been falling against the ruble and a number of other national currencies, but primarily against the euro. The exchange rate of the ruble against the European currency, although declining, has slowed down over the past 3-4 years, forcing large exporters, including Russian ones, to switch to the euro.

As is known, the dependence of the national currency rate on the inflation rate is especially high in countries with a large volume of international exchange of goods, services and capital, and the relationship between the dynamics of currencies and the relative rate of inflation is most clearly manifested when calculating the exchange rate based on export prices. In this regard, both Russia and the United States are approximately on equal footing, with the only exception that Russian oil and gas exports are accompanied by a long and tall world prices for these products, which has a positive effect on Russia's balance of payments, and the United States, in the context of an expensive and unsuccessful military operation in the Middle East, has a balance of payments deficit.

Just like other exporting countries, Russia uses a wide arsenal of means to regulate international credit relations - these are tax and customs benefits, state guarantees and subsidizing interest rates, subsidies and loans. However, to a greater extent, the Russian state supports large corporations and banks, as a rule, with a solid state participation, that is, itself. But medium and small businesses get little from the flow of benefits that spills onto large businesses. On the contrary, loans for the purchase of imported equipment are provided to small and medium-sized companies that are not included in small business support programs on conditions that are significantly more stringent than for large businesses.

The exchange rate and the direction of movement of world capital are also affected by the difference in interest rates in different countries. An increase in interest rates stimulates the inflow of foreign capital into the country and vice versa, and the movement of speculative, "hot" money increases the instability of the balance of payments. But it is unlikely that the regulation of interest rates is productive due to the need to control liquidity, which means that it can hinder economic growth. At the same time, the Central Bank reduced the rate of deductions to the Mandatory Reserve Fund for ruble deposits. This measure is justified by the fact that reserve requirements are lower in Europe, and Russian banks find themselves in unequal conditions.

Conclusion

In general, the above allows us to draw the following conclusions.

1. External and internal factors in relation to business affect the effect of financial leverage and the strength of its impact, and this affects the financial behavior of domestic companies and banks of different sizes in different ways.

2. External factors related to government regulation of certain areas of business activity (taxation, dynamics of the cost of bank loans, government financing of business support programs, etc.), as well as market influence (bond and stock yields, price dynamics in the world market, exchange rate dynamics currencies, etc.) have a stronger influence on the effect of financial leverage than internal factors controlled by the business itself.

3. An assessment of the degree of influence of external factors, primarily state regulation, on the financial behavior of business entities of various sizes shows that it is focused on supporting, first of all, banks and large businesses, sometimes to the detriment of the interests of medium and small businesses.

4. A feature of large Russian business, which makes maximum use of the effect of financial leverage in its financial strategies, is the significant participation of the state in these largest corporations and banks. Thus, for the latter, state regulation is not an absolutely external factor.

5. Really manages the capital structure in a changing external environment and, due to its capabilities, only business in which the state does not participate, that is, medium and small companies. The state does this for big business, creating the most favored nation treatment for it.

6. Management of the capital structure and the formation of appropriate financial strategies by medium and small businesses pushes them beyond the legal field, since the Russian financial market today is built and adjusted to the interests of large business with state participation.

7. The global liquidity crisis, in which the Russian economy is also involved through large-scale loans to large businesses in the external financial market, may further weaken the financial capabilities of medium and small businesses and lead to mass bankruptcies of enterprises in these categories, while large businesses will be protected by the state .

Summing up, it should be noted that such a concept as accounts payable cannot be given an unambiguous assessment. Borrowed funds are necessary for the development of the enterprise. However, illiterate management can lead to an increase in debt and the inability to pay off debts. On the other hand, with skillful management, with the help of borrowed funds, you can save and increase your own funds. Therefore, borrowing money can be both beneficial and harmful.

Bibliography

1. Galitskaya S.V. Financial management. The financial analysis. Enterprise finance: textbook. allowance / S.V. Galician. - M. : Eksmo, 2008. - 651 p. - (Higher economic Education)

2. Rumyantseva E.E. Financial management: textbook / E.E. Rumyantsev. - M. : RAGS, 2009. - 304 p.

3. Financial management [Electronic resource]: electron. textbook / A.N. Gavrilova [i dr.]. - M. : KnoRus, 2009. - 1 p.

4. Financial management: textbook. allowance for universities / A.N. Gavrilova [i dr.]. - 5th ed., erased. - M. : KnoRus, 2009. - 432 p.

5. Financial management: textbook. allowance for universities / A.N. Gavrilova [i dr.]. - 5th ed., erased. - M. : KnoRus, 2008. - 432 p.

6. Galitskaya S.V. Financial management. The financial analysis. Enterprise finance: textbook. allowance / S.V. Galician. - M. : Eksmo, 2009. - 651 p. - (Higher economic education)

7. Surovtsev M.E. Financial management: workshop; textbook allowance / M.E. Surovtsev, L.V. Voronova. - M.: Eksmo, 2009. - 140 p. - (Higher economic education)

8. Nikitina N.V. Financial management: textbook. allowance / N.V. Nikitin. - M. : KnoRus, 2009. - 336 p.

9. Savitskaya G.V. Analysis economic activity enterprises: textbook / G.V. Savitskaya. - 5th ed., revised. and additional - M. : INFRA-M, 2009. - 536 p. -( Higher education)

10. Kozenkova T. Models and forms of organization of financial management / T. Kozenkova, Yu. Svatalova // Your partner is a consultant. - 2009. - No. 25. - S.

11. Cheremisina T.P. The power of financial leverage in modern Russia / T.P. Cheremisina // IVF. - 2008. - No. 5. - S. 27-41.

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The ability to generate income is the main characteristic of the company's capital. In whichever of the sectors of the economy (real or financial) capital is directed as economic resource, given that effective use it must always be profitable.

Thus, the main goal of any investor is to maximize the return on his invested capital. The capital structure is quite important. The reason for this importance lies in the differences between equity and accounts payable. Equity capital is the main risk capital of the company. The peculiarity of equity capital is that it does not give a guaranteed profit, which must be paid in any course of business.

In addition, there is no fixed timetable for recoupment of long-term investments. The main indicator of return on equity is the return on equity (ROE).

Own vs. borrowed

Any capital that can be withdrawn at the request of the depositor should not be considered as own, but as a debt.

Both short-term and long-term debt must be paid. How longer term the less burdensome the terms of its repayment, the easier it is for the company to service it.

It follows that the greater the share of borrowed funds in the total capital structure, the greater the amount of payments with fixed terms and payment obligations.

And the greater the likelihood of a chain of events leading to an inability to pay interest and principal when due.

Scheme. Interpretations of the concept of "loan capital"

Debt is a less expensive source of cash compared to equity because, unlike dividends, which are distributions of profits, interest is treated as an expense and is therefore tax deductible.

Risk Lever
Among the main characteristics of financial leverage are the following.
1. Big share borrowed capital in the total amount of long-term sources of financing is characterized as a high level of financial leverage and financial risk.
2. Financial leverage indicates the presence and degree of dependence of the company on third-party investors temporarily lending to the company.
3. Attracting long-term credits and loans is accompanied by an increase in financial leverage and, accordingly, financial risk. This risk is expressed in an increase in the probability of default on debt service obligations. The essence of financial risk is that debt service payments are mandatory. Therefore, in case of insufficient gross profit to cover them, it may be necessary to liquidate part of the assets, which is accompanied by direct and indirect losses.

Based on the return on equity formula (ROE = return on sales x asset turnover ratio x financial leverage), we see that the profitability of a company, in addition to operating results, also depends on the structure of its capital, that is, the sources of financing for its activities.

The sources that ensure the long-term activity of the company consist of long-term liabilities (loans, debt obligations, bonds) and the company's equity capital (preferred and ordinary shares).

Interpreting Capital

One of the objective factors affecting the return on equity is financial leverage.

Financial leverage means the inclusion of debt (borrowed funds) in the capital structure of the company, which gives a constant profit, allows you to get additional profit from equity capital.

Financial leverage is the ratio of borrowed funds to equity.

When determining the financial leverage in practice, the main question arises: what should be classified as "loan capital"?

Borrowed capital has, as a rule, three interpretations.

When determining the financial leverage and the effect of its use, they mean the second option, that is, the entire debt on which interest is paid on its service.

Efficient financing

Strengthening the financial leverage, that is, an increase in the share of borrowed funds, is not only a factor that increases the return on equity, but also a factor that increases the risk of insolvency of the company.

For a company with high level financial leverage, even a slight change in earnings before interest and taxes (operating income) can lead to a significant change in net income.

The amount of additionally generated profit in terms of equity capital with varying degrees of use of borrowed funds is estimated using such an indicator as the effect of financial leverage (EFF).

The leverage effect formula is as follows:

EFR \u003d (1 - T) x (RA - P) x PFR, where T is the income tax rate, RA is the return on assets on operating profit, P is interest on debt service, PFR is the financial leverage. The financial leverage differential (RFI) is the difference between the return on assets (RA) on operating income and the debt service rate (interest on a loan) (P):

DFR \u003d RA - P

The leverage of financial leverage (PFR) is the ratio of equity capital (SK) and borrowed capital (LC): PFR = LC/SK

Leverage in action

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

Example 1

Let's take two companies with the same results of operations, but company A's employed capital consists entirely of equity, while company B has both equity and borrowed capital.

We group the data of the example in table 1.

As can be seen from the table, the effect of financial leverage for company B was:

EGF \u003d (1-0.2) x (16-12) x 200,000/300,000 \u003d 2.1%.

From the example and formula of the effect of financial leverage, it can be seen that the higher the share of borrowed funds in the total amount of capital used, the more profit the company receives from its capital.

Let's consider how different components of the formula for the effect of financial leverage affect the change in its size.

Income tax is established by law, and the organization cannot influence it in any way, however, if the company is diversified, territorially fragmented, it must be taken into account that according to different types activities in the regions, different rates of income tax to the budgets of the constituent entities of the Russian Federation can be established.

A company can, by influencing its regional or production structure, influence the composition of profits by the level of its taxation.

Table 1. Effect of financial leverage

No. p / p	Indicators	Performance results
No. p / p	Indicators	Company A	Company B








	Income tax rate, %

	Net profit, thousand rubles

	Increase in return on equity, %

This means that it is possible, by lowering the average profit tax rate, to increase the impact of the tax rate on the effect of financial leverage.

Example 2

According to the results of 2009 and 2010, company B showed the same financial results.

The only difference is that in 2010 the company had two separate subdivisions registered in regions with a reduced income tax rate to the budget of a constituent entity of the Russian Federation, as a result of which the average percentage of income tax for 2010 for the company as a whole was 19%.

Table 2. Influence of the income tax rate on the increase in return on equity

No. p / p	Indicators	Performance results
No. p / p	Indicators	2010	2009
	The amount of used capital of the company, thousand rubles. including:
	The amount of equity, thousand rubles.
	The amount of borrowed capital, thousand rubles.
	Operating income excluding taxes and interest on debt service (EBIT), thousand rubles
	Return on assets based on operating profit, %
	Interest on a loan for the reporting period, %
	The amount of interest on debt service, thousand rubles. ((clause 3 x clause 6)/100)
	Profit including interest on debt service (profit before taxes), thousand rubles (EBT) (p. 4 - p. 7)
	Income tax rate, %
	The amount of income tax, thousand rubles. ((clause 8 x clause 9)/100)
	Net profit, thousand rubles
	Return on equity based on net profit, % ((clause 11/ clause 2) х 100)

As can be seen from Table 2, a 1 percentage point change in the income tax rate gave company B an increase in the return on equity in 2010 by 0.2 percentage points.

The financial leverage differential is the main condition that forms the positive effect of financial leverage.

The higher the positive value of the differential, the higher, other things being equal, will be the effect of financial leverage.

But this effect will manifest itself only if the gross return on assets is higher than the level of interest on debt service.

If these indicators are equal, the effect will be equal to zero.

If the level of interest on debt service exceeds the gross margin, then the effect of financial leverage will be negative.

Example 3

Consider three companies with a constant debt service rate of 12% and different operating income return on assets.

With a positive value of the differential, any increase in the financial leverage ratio will cause an even greater increase in the return on equity ratio.

And with a negative value of the differential, the increase in the financial leverage ratio will lead to an even greater rate of decline in the return on equity ratio.

Thus, with the differential unchanged, the financial leverage ratio is the main generator of both the increase in the amount and level of return on equity, and the financial risk of losing this profit.

Table 3. Effect of financial leverage differential on the effect of financial leverage

No. p / p	Indicators	Company 1	Company 2	Company 3
	Return on assets based on operating income
	Debt service interest
	Financial leverage differential
	Income tax rate
	The amount of equity, thousand rubles.
	The amount of borrowed capital, thousand rubles.
	Financial Leverage
	The effect of financial leverage

Similarly, with a constant financial leverage ratio, the positive or negative dynamics of its differential generates both an increase in the amount and level of return on equity, and the financial risk of its loss.

In the process of financial management, the indicator of the financial leverage differential requires constant monitoring, as it is subject to high volatility. The following factors influence the variability of this indicator.

1. Due to the volatile situation in the financial markets, the cost of borrowings may increase significantly, exceeding the level of gross profit generated by the company's assets.

With an increase in the rate for attracting credit funds, a situation may arise when, under tax legislation, a company will not be able to include the entire debt service rate in expenses.

If such a situation arises, the calculation must take into account the rate that the company can take into account when taxing.

2. An increase in the share of borrowed capital used leads to a decrease in the financial stability of the company and an increase in the risk of bankruptcy, which negatively affects the cost of attracted financial resources, as creditors seek to increase interest by including a premium for additional financial risk in them.

At a certain level of the rate for the use of credit funds, the financial leverage differential can be reduced to zero (in this case, the use of borrowed capital will not increase the return on equity) and even have a negative value (at which the return on equity will decrease).

3. During a period of decrease in sales volumes in the company or due to an increase in the cost of goods sold, the amount of gross profit decreases.

Under such conditions, a negative value of the financial leverage differential can also form at constant interest rates for a loan due to a decrease in the gross return on assets.

The formation of a negative value of the financial leverage differential for any of the considered reasons always leads to a decrease in the return on equity ratio.

In this case, the use of borrowed funds has a negative effect.

Managing the level of financial leverage does not mean achieving a certain target value, but controlling its dynamics and providing a comfortable safety margin in terms of operating profit (earnings before interest and taxes) exceeding the amount of conditionally fixed financial expenses.

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 in making managerial 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 effect of financial leverage and calculation methods

1.1 The first way to calculate financial leverage

1.2 The second method of calculating financial leverage

1.3 The third method of calculating financial leverage

2. Coupled effect of operational and financial leverage

3. Strength of financial leverage in Russia

3.1 Controllable factors

3.2 Business size matters

3.3 Structure of external factors influencing the effect of financial leverage

Conclusion

Bibliography

Introduction

Profit is the simplest and at the same time the most complex economic category. It received a new content in the conditions of the modern economic development of the country, the formation of real independence of business entities. Being the main driving force of the market economy, it ensures the interests of the state, owners and personnel of the enterprise. Therefore, one of the urgent tasks of the current stage is the mastery of managers and financial managers with modern methods of effective management of profit formation 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. Of priority importance is the rule that both own and borrowed funds must provide a return in the form of profit. Competent, effective management of profit formation provides for the construction at the enterprise of appropriate organizational and methodological systems for ensuring this management, knowledge of the main mechanisms for generating profit, the use of modern methods of its analysis and planning. One of the main mechanisms for the implementation of this task is the financial lever

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

Tasks include:

Consider the financial and economic content

Consider calculation methods

Consider the scope

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

The effect of financial leverage(EFF) shows by what percentage the return on equity increases by attracting borrowed funds into the turnover of the enterprise and is calculated by the formula:

EGF \u003d (1-Np) * (Ra-Tszk) * ZK / SK

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

Rp - 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 zk - weighted average price of borrowed capital, in fractions of units;

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

There are three components in the above formula for calculating the effect of financial leverage:

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

♦ financial leverage ZK/SK

EGF \u003d ((1-Np) * (Ra - Tsk / 1 + i) * ZK / SK,

where i is the 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 differentiated tax rates are established for various types of enterprise activities;

♦ if the enterprise uses income tax benefits for certain types of activities;

♦ if individual subsidiaries of the enterprise operate in the free economic zones of their country, where there is a preferential regime for profit taxation, as well as in foreign countries.

For any enterprise, the priority is the rule that both own and borrowed funds must provide a return in the form of profit. The action of the financial leverage (leverage) characterizes the feasibility and efficiency of the use of borrowed funds by the enterprise as a source of financing of economic activity.

Financial Leverage Effect (E.F.R.) is that the company, using borrowed funds, changes the net profitability of own funds. This effect arises from the discrepancy between the profitability of assets (property) and the "price" of borrowed capital, i.e. average bank rate. At the same time, the company must provide for such a return on assets so that the funds are sufficient to pay interest on the loan and pay income tax.

It should be borne in mind that the average calculated interest rate does not coincide with the interest rate accepted under the terms of the loan agreement. Average settlement rate set according to the formula:

where: joint venture- the average settlement rate for a loan; FI to- actual financial costs for all loans received for the billing period (the amount of interest paid); AP amount- the total amount of borrowed funds attracted in the billing period.

General formula for calculating the effect of financial leverage (EFF) can be expressed:

where: H– income tax rate in fractions of a unit; R A– economic return on assets (based on the amount of profit before taxes and interest on loans); joint venture- average calculated interest rate for a loan in %; ZK- borrowed capital; SC- equity.

1. tax corrector (1–H), shows the extent to which E.F.R. due to different levels of taxation. It does not depend on the activities of the enterprise, because income tax rate is approved by law.

In the process of managing F.R. A differentiated tax corrector can be used in cases where: 1) differentiated tax rates are established for various types of enterprise activities; 2) for certain types of activities, enterprises use income tax benefits; 3) individual subsidiaries (branches) of the enterprise carry out their activities in free economic zones both in their own country and abroad.

2. Lever differential (R A -SP) characterizes the difference between economic profitability and the average interest rate for a loan, i.e. it is the main factor that forms a positive E.F.R. value. Condition R A >SP specifies a positive E.F.R., i.e. the use of borrowed capital will be beneficial for the enterprise. The higher the positive value of the differential, the more significant, all other things being equal, the value of E.F.R.

Due to the high dynamism of this indicator, it requires systematic monitoring in the management process. The dynamism of the differential is due to a number of factors: (1) during a period of deterioration in the financial market, the cost of raising borrowed funds may increase sharply and exceed the level of accounting profit generated by the assets of the enterprise; (2) a decrease in financial stability, in the process of intensive attraction of borrowed capital, leads to an increase in the risk of bankruptcy of the enterprise, which makes it necessary to increase interest rates for a loan, taking into account the premium for additional risk. Differential F.R. then it can be reduced to zero or even to a negative value, as a result, the return on equity will decrease, because. part of the profit it generates will be used to service the debt received at high interest rates; (3) during the period of deterioration in the situation on the commodity market, reduction in sales and accounting profit, a negative value of the differential can form even at stable interest rates due to a decrease in the return on assets.

The negative value of the differential leads to a decrease in the return on equity, which makes its use inefficient.

3. financial leverage (coefficient of financial dependence KFZ) reflects the amount of borrowed capital used by the organization per unit of equity. It is a multiplier that changes the positive or negative value of the differential.

When positive nom value of the differential, any increase in K.F.Z. will lead to an even greater increase in the return on equity. At negative value differential gain K.F.Z. will lead to an even greater drop in the return on equity.

So, with a stable differential K.F.Z. is the main factor influencing the amount of return on equity, i.e. it generates financial risk. Similarly, with a constant value of K.F.Z, a positive or negative value of the differential generates both an increase in the amount and level of return on equity, and the financial risk of its loss.

Combining the three components of the effect (tax corrector, differential and C.F.Z.), we get the value of E.F.R. This method of calculation allows the company to determine the safe amount of borrowed funds, that is, acceptable lending conditions.

To implement these favorable opportunities, it is necessary to establish the relationship and contradiction between the differential and the coefficient of financial dependence. The fact is that with an increase in the amount of borrowed funds, the financial costs of servicing the debt increase, which in turn leads to a decrease positive value differential (with a constant value of return on equity).

From the foregoing, the following conclusions can be drawn: (1) if a new borrowing brings an increase in the level of E.F,R to an enterprise, then it is beneficial for the enterprise. At the same time, it is necessary to control the state of the differential, since with an increase in the debt ratio, a commercial bank is forced to compensate for the increase in credit risk by increasing the “price” of borrowed funds; (2) the creditor's risk is expressed by the value of the differential, since the higher the differential, the lower the bank's credit risk. Conversely, if the differential becomes less than zero, then the leverage effect will act to the detriment of the enterprise, that is, there will be a deduction from the return on equity, and investors will not be willing to buy shares of the issuing enterprise with a negative differential.

Thus, an enterprise's debt to a commercial bank is neither good nor evil, but it is its financial risk. By attracting borrowed funds, an enterprise can more successfully fulfill its tasks if it invests them in highly profitable assets or real investment projects with a quick return on investment. The main task for the financial manager is not to eliminate all risks, but to accept reasonable, pre-calculated risks, within the positive value of the differential. This rule is also important for the bank, because a borrower with a negative differential is distrustful.

The second way to calculate E.F.R. can be viewed as a percentage (index) change in net profit per ordinary share, and the fluctuation in gross profit caused by this percentage change. In other words, E.F.R. is determined by the following formula:

where ∆P F A- percentage change in net profit per ordinary share; ∆P V A- percentage change in gross earnings per ordinary share

The smaller the impact of financial leverage, the lower the financial risk associated with this enterprise. If borrowed funds are not involved in circulation, then the force of the financial leverage is equal to 1.

The greater the force of financial leverage, the higher the level of financial risk of the enterprise in this case: (1) for commercial bank the risk of non-repayment of the loan and interest on it increases; (2) for the investor, the risk of reducing dividends on the shares of the issuing enterprise with a high level of financial risk that he owns increases.

The second method of measuring the effect of financial leverage makes it possible to perform an associated calculation of the strength of the impact of financial leverage and establish the total (general) risk associated with the enterprise.

In inflationary conditions, if debt and interest on it are not indexed, E.F.R. increases as debt service and debt itself are paid for with already depreciated money. It follows that in an inflationary environment, even with a negative value of the differential of financial leverage, the effect of the latter can be positive due to non-indexation of debt obligations, which creates additional income from the use of borrowed funds and increases the amount of equity capital.