Zmiany warunku działania dźwigni finansowej w gospodarce inflacyjnej
Changes in the Financial Leverage Formula in an Inflationary Economy

Summary/Abstract: Financial leverage is one of the fundamental instruments of the financial analysis of a company. The positive effects which result from the relationship between a company’s level of operating profit and the level of cost of capital are true, however, only under certain assumptions. One of these assumptions is the lack of inflation in the economy. Inflation tends to deform the real cost of capital. Applying the instrument of financial leverage in the circumstances of inflationary economy, without subjecting it first to appropriate modifications, can lead to a number of difficulties and give rise to wrong conclusions. This essay shows how the decrease in the real value of money influences the evaluation of the particular components of the formula for calculating a company’s financial leverage. It concludes with a derivation of a formula for the calculation of financial leverage under inflationary conditions. The formula serves as the universal expression of this instrument of financial analysis in the conditions of both an inflationary and non-inflationary economy

• Details
• Contents