Financial leverage refers to the use of fixed-cost sources of finance, particularly debt and preference share capital, in the capital structure of a firm. It arises because a firm uses funds on which it has to pay fixed financial charges, such as interest on loans and debentures, irrespective of its level of operating profit. Financial leverage is an important concept in financial management because it affects the relationship between operating profit and earnings available to equity shareholders. The degree of financial leverage indicates how sensitive earnings per share (EPS) are to changes in operating profit. The basic principle of financial leverage is that borrowed funds can magnify the returns available to equity shareholders when the firm earns a return on its investments greater than the cost of debt. For example, if a company borrows money at an interest rate of 8% and earns 12% on the funds invested, the difference benefits equity shareholders. However, if the return earned is lower than the cost of borrowing, debt financing reduces shareholders’ earnings. Thus, financial leverage can work both positively and negatively. The impact of financial leverage on EPS can be understood through the relationship between Earnings Before Interest and Tax (EBIT), interest expenses, taxes and the number of equity shares. When a firm uses debt, interest has to be