BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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No change with EBIT and EPS
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The sensibility of EBIT with % change with respect to output
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The sensibility of EPS with % change in the EBIT level
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% variation in the level of production
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Detailed explanation-1: -The degree of financial leverage (DFL) measures the percentage change in EPS for a unit change in operating income, also known as earnings before interest and taxes (EBIT). This ratio indicates that the higher the degree of financial leverage, the more volatile earnings will be.
Detailed explanation-2: -DFL determines the percentage change in a company’s EPS per unit change in its EBIT. A company’s DFL is calculated by dividing its percentage change in EPS by the percentage change in EBIT over a certain period. It can also be calculated by dividing a company’s EBIT by its EBIT less interest expense.
Detailed explanation-3: -Financial leverage helps to examine the relationship between EBIT and EPS. Financial leverage measures the percentage of change in taxable income to the percentage change in EBIT. Financial leverage locates the correct profitable financial decision regarding capital structure of the company.
Detailed explanation-4: -The higher the degree of operating leverage (DOL), the more sensitive a company’s earnings before interest and taxes (EBIT) are to changes in sales, assuming all other variables remain constant. The DOL ratio helps analysts determine what the impact of any change in sales will be on the company’s earnings.
Detailed explanation-5: -Answer and Explanation: Degree of total leverage or combined leverage is the answer because it is the only ratio that shows effect of percentage change in EPS by percentage change in sales.