Question

    The degree of financial leverage may be defined

    as:
    A percent change in sales/percent change in volume Correct Answer Incorrect Answer
    B percent change in EPS/percent change in net income Correct Answer Incorrect Answer
    C percent change in EPS/percent change in EBIT Correct Answer Incorrect Answer
    D percent change in EPS/percent change in sales Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    The degree of financial leverage measures the sensitivity of a company's earnings per share (EPS) to changes in its earnings before interest and taxes (EBIT). It is calculated by taking the percentage change in EPS divided by the percentage change in EBIT. This ratio helps to assess the impact of changes in operating income on the company's bottom line and the potential amplification of those changes on EPS.

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