CFAI Curriculum Vol 4, P.80
The footnote on this page states that taxes are igored and the general conclusions remain the same. It seems that this applies for all cases in this reading.
Is this realistic ? Can we always ignore taxes effect in measuring leverages and net incomes ?
If you let me know what the conclusions are, I might be able to comment somewhat intelligently.
The general conclusions shall refer to :
Percentage change in Net Income = DFL x Percentage change in Operating Income and Percentage change in Net Income = DTL x Percentage change in the numer of units sold.
DFL : Degree of Financial Leverage DTL : Degree of Total Leverage
Yes: the conlusions are the same as long as the tax rate is constant, whether it’s 40%, 5%, 0%, whatever.
%ΔEBT = %ΔNI, no matter what the tax rate.
Alpha668, the assumption is that income taxes scale nicely with income before tax, i.e. the effective tax rate stays constant. Each additional dollar of income before tax generates the same additional income tax charge. If that is the case, taxes are a variable expense and introduce no additional distortions to leverage (as measured by DFL and DTL).
This will be true in the absence of permanent differences between financial and tax reporting. The deferred tax charge should take care of keeping the effective tax rate nice and stable.
This is somewhat of a simplification, but I don’t think it makes the results in that reading any less viable.
simultaneous posts with S2000magician 
of course, I agree with the conclusions
Shall it be : DFL x %ΔEBT = %ΔNI ?
Wojtek / s2000magician :
Thank you for your clarifications !
No.
Suppose EBT changes from 1,000 to 1,200, so %ΔEBT = ΔEBT ÷ EBT = (1,200 - 1,000) ÷ 1,000 = 0.20 = 20%.
If the tax rate is 0%, then NI = EBT, so %ΔNI = ΔNI ÷ NI = (1,200 - 1,000) ÷ 1,000 = 0.20 = 20%.
If the tax rate is 5%, then NI changes from 950 to 1,140, and %ΔNI = ΔNI ÷ NI = (1,140 - 950) ÷ 950 = 0.20 = 20%.
If the tax rate is 40%, then NI changes from 600 to 720, and %ΔNI = ΔNI ÷ NI = (720 - 600) ÷ 600 = 0.20 = 20%.
No matter what the tax rate is, %ΔEBT = %ΔNI.
Happy to help.
S2000magician :
It shall be my confusion regarding EBIT and EBT. Is it that EBIT is the so-called “Operating income” ?
If so, then, what I meant is : DFL x %Δ EBIT = %ΔNI. Am I correct ?
Of course you shall be right in that %ΔEBT = %ΔNI.
Don’t fret; we all get confused sometimes, and FRA can be especially confusing.
Yes, EBIT and operating income (or operating profit) are synonymous.
Indeed, you are.
Thanks.