Which of the following are related to Combined Leverage (CL)?

(A) CL = Contribution / PBT
(B) CL = EBIT / PBT
(C) CL = Contribution / EBIT
(D) CL = % Change in EPS/ % Change in Sales
(E) CL = Operating leverage × Financial leverage

Choose the correct answer from the options given below:

Correct option is C

Introduction:

Combined Leverage (CL) measures the combined effect of operating leverage and financial leverage on a firm’s Earnings Per Share (EPS).
It shows how sensitive EPS is to changes in sales.

A firm uses two types of leverage:

1. Operating Leverage (OL) → Comes from fixed operating costs
   
   OL = Contribution / EBIT
   
   

2. Financial Leverage (FL) → Comes from fixed financial costs (interest)
   
   FL = EBIT / PBT
   

When both operate together:

CL = OL × FL​

Information Booster:

(A) CL = Contribution / PBT → Correct

This is the final combined leverage formula after multiplying OL and FL.

(B) CL = EBIT / PBT → Incorrect

This is only the Financial Leverage (FL) formula.
Not CL.

(C) CL = Contribution / EBIT → Incorrect

This is Operating Leverage (OL), not CL.

(D) CL = % Change in EPS / % Change in Sales → Correct

This is the behavioural interpretation of combined leverage.
It directly measures the impact of sales movement on EPS.

(E) CL = Operating leverage × Financial leverage → Correct

This is the standard textbook definition of combined leverage.

Additional Informaton:

• If CL = 4, it means:
  1% increase in sales → 4% increase in EPS

• High CL = high risk + high return potential.

• Used for capital structure decisions + risk analysis in financial management.