influence of financial leverage on shareholders

8/13/2019 Influence of Financial Leverage on Shareholders

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Financial leverage measures firms exposure tothe financial riskExplores the effect of financial leverage on

shareholders return and market capitalizationSeven major automotive public companieswere undertakenCluster approach was used to create favorable

conditions and encourages linkedorganizationsSimple linear regression analysis was carriedout


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A. Financial leverage:Debt amount used in the capital structure ofthe firmImpact on returnslower the amount borrowed, lower the interest,lower will be the profit

Greater the amount borrowed, lower theinterest, greater will be the profitFixed service obligation


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Financial leverage measures firms exposure tothe financial riskDegree of financial leverage indicates thepercentage change in EPS resulting from a unitpercentage change in EBITFinancial leverage ratio is calculated by

dividing assets by shareholder equityPotential of increasing the shareholders wealth


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B. Share Holders Return:Result of the efficiency of all commercial,operational and financial activity of theenterpriseCompare the performance of differentcompanies stocks and shares over time

SR = (Price(end) Price(begin) x No. of Shares


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C. Market Capitalization:Aggregate value of a companyCalculated by multiplying the number ofshares outstanding by their current price pershareTemporary metric

True value of the company (profits, productpositioning, balance sheet, etc)Low market capitalization


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With risky debt outstanding, a firm'sinvestment policy is not fixedShareholders fail to exercise the investmentoptionA small change in the level of sales, will havedramatic effect on EPS


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High-growth firms have lower financialleverage

Combine operating and financial leverages tosee the effect of total leverage on EPSThe variables sales, interest, cash flow, assetstructure, firms size, retained earnings, EBITand intrinsic value of shares influence financialleverage


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To study the influence of financial leverage onshareholders return and market capitalizationof automotive cluster companies of Pithampur


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Ho1: There is no significant influence of

financial leverage on shareholders return.Ho2: There is no significant influence offinancial leverage on market capitalization.


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Empirical nature studyThe population of the study includes theautomotive cluster companies ofPithampur, (M.P.), India.The study covered five years time period

Secondary data was used


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Dependent Variable: Shareholders return andmark capitalizationIndependent Variables: Financial leverageLinear simple regression had been used as atool to analyze the data


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The study concludes that there might be othernon quantitative factors which may lead tonullify the impact of financial leverage on

shareholders return like recession, saturation ofauto industry, competition and governmentpolicy

influence of financial leverage on shareholders

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