Classical risk mitigation models and Capital structure planning for Corporations

Dear sir, 
        What I am trying to convey is mainly regarding the DOL and DTL equations. 
DOL is calculated as (S-V)/(S-V-F) (but you swapped the num & deno).. again DTL = (S-V)/(EBIT-I).
Sir, both measures leveraging effect and to have a leveraging effect we need an answer greater than 1. 
Sir please check the corresponding equations you gave.
               ( Sir my expression skills are poor and I request apology for any confusion caused due to)
 Now as far as taxes are concerned, they need to be considered only when there is preference dividend, as they are not tax deductable like other expenses.
And regarding risk, definitely on the downside there is risk.
Thanks for listening to me….

Dear Padmanabhan,
           Thanks for showing of the error which is regreted but the philosophy doesn't change. It still takes care of the taxes and this is a hypothetical example not the real numbers.
I think on correction 1.2 the bottom line shrinks to 2.4. So 9.6 is interest and taxes. It was a translation error not intentional.
The idea is the real rate shrinks to actual rate(1-tax) which is by which the bottom line gets increased due to interest on debt.

Dear Sir, here you gave “DFL= 60/(60-10)=1.50”
60/50 = 1.2 and not 1.5 please note

Now going with your example, 

DTL = DOL*DFL ( how did you get “DTL= 0.6x0.5=0.3
To check 20 x 0.3 = 6” Sir you calculated DOL as .6 and DFL as 1.5 and as per your calculation DTL = .6*1.5 = .9 and not .3)

Here again in your example the %of variable cost is not given.If 100 is sales less variable cost(As it should be as per your equation (S-V-F)=(S-V-40) = 60) then how the additional net income is 6. Here the 20 increase should then be additional sales less additional variable cost, then additional net income should be 20.

(Now with your example sales 100(which is sales less variable cost), fixed cost 40, interest 10.

DOL = (S-v)/(S-v-f) = 100/60 = 1.67
DFL = EBIT/(EBIT – I)= 60/50 = 1.2
And DTL = DFL*DOL = 1.2*1.67 = 2
Which implies that for every 1% increase in sale there is a corresponding 2% increase in net income
Ie, for 20% increase in sales there is 40% increase in net income.

Now for the 20% increase given
Current net income = 100-40-10 = 50
This 20 % increase will result in an increase in income of 20%(S-v), as fixed and interest cost doesn’t change.
Ie, 20% of 100 = 20
Now % increase in net income = 20/50 = 40%

Thank you

Example
I will go with the same example given above.
Suppose a company has sales of 100, Fixed cost of 40, interest of 10
Then DOL = (100-40/100= 0.6
DFL= 60/(60-10)=1.50
Let the growth be 20%

100--------------------------20
                             x0.6 
                             =12
)                            x0.5
                             =6= Net Income
Now, DTL= 0.6x0.5=0.3
To check 20 x 0.3 = 6 concuring with Net Income
Now you see 10 interest is 16% of operating income 60
so, 16% of 12 is almost 2
Now 12 - 2 - 4 = 6 where we see a tax allocation of 40% incorporated in the equation which need not have to be calculated separately. Then there are some more things that need to be explained but I don't know whether they use it here. So about taxes also, yes it is incorporated.)

Dear sir,
  You gave” DOL = change in EBIT to change in Sales = (S-V-F)/S”.
But DOL =  S-V/(S-V-FC) 
Kindly refer   Wikipepidia  http://en.wikipedia.org/wiki/Operating_leverage. 
DOLmeasures the leveraging effect that  fixed cost have on operating profit.
Consider a sale of 100, with 40 fixed cost, 20% of sale variable, 10 interest payable.
Here DOL = S-V/(S-V-FC) = (100-20)/ (100-20-40) = 2
( DOL of 2 implies that for every 1% increase in sale there will be a corresponding 2% increase in operating profit,
Consider a 50% increase, As per DOLincrease in  operating profit = 100%
On solving, new operating profit = (100*1.5)-(100*1.5*.2+40) = 80,
Here as sales increased from 100 to 150(50% increase), operating profit increased from 40 to 80 (100%)
i e, double and here DOL = 2
Likely DFL = EBIT/(EBIT-I)
So here DFL = 40/ (40-10) = 1.33 (It measures the leveraging effect of fixed financial  charges)
DTL = DFL*DOL = 2*1.33 = 2.67
Again consider the above change
Initial net income = 30, now as per DFL new net income (50% increase) = 50 *2.67 =133.33% 
On calculating, new net income = 80-10=70
I e, an increase of 40 (70 -30), % increase = 40/30 = 133.33% as given by the DTL.

U R VERY RIGHT Me. mathew.. the model is best for corporate control ..
very informative article..

Dear Padmanabhan,
 It is %ages. Let me give an example, suppose if you have a sale of 100 and grwoing next year to 120. Say the FC is 40. Now DOL is 60%. Now 60% of 20 is 12 which is by the amount EBIT is growing. So there is no mistake in denominator and mumerator swaping. The other part is also correct. You can choose an example like the above and it is 1+(number/100). 

Thanks for the article viktor, was really helpful.....

Nice work sir,
                           This can be used to forecast amount of sales required to make a certain dividend payment.  
But I think there is some typing error, Please refer the equations for calculating DOL (accidently swapped the numerator and denominator)  and DFL. (or it is the percentage change rather than change)
DOL =(S – VC) / (S-VC-F)= (S-VC)/ EBIT
DFL = EBIT/ [EBIT-I-(PD/(1-t)]
And DTL= DOL*DFL = (S-VC)/ [EBIT-I-(PD/(1-t)]
                Where  S – sales
                              VC- Variable Cost
                             F- Fixed cost
                             I – interest, t – tax rate
Here PD/(1-t) is applicable only when there is preference dividend which is not tax deductable.
So now without preference dividend,
DTL = (S-VC)/ (EBIT-I)
For forecasting sales required for a certain dividend, again tax should be adjusted as it is not tax deductable.

These models are basicaly used for Corporate Control.

Thanks for sharing this info. 

Nice post. Very informative. Thanks for sharing.