GK
ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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EPS to change in EBIT
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EPS to change in total revenue
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Operating income to change in total revenue
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None of the above
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Detailed explanation-1: -Higher use of debt results in higher financial leverage. This type of leverage affects the company’s earnings per share (EPS) because the degree of financial leverage is the percent change in EPS for a one percent change in earnings before interest and tax (EBIT). Financial leverage, however, does not affect EBIT.
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: -EPS, of course, largely depends on a company’s earnings. For EPS calculation, earnings before interest and taxes (EBIT) is used because it reflects the amount of profit that remains after accounting for those expenses necessary to keep the business going. EBIT is also often referred to as operating income.