A high degree of financial leverage means that a small change in sales will result in:
A) a small change in earnings per share
B) a large change in earnings per share
C) no change in earnings per share
D) always a negative change in earnings per share

Question

Quizplus · Accepted Answer

High financial leverage means that a company has a high amount of debt in its capital structure. This results in higher fixed interest payments which must be paid regardless of the level of sales. Therefore, a small change in sales can significantly impact the earnings per share, as the fixed interest payments can have a magnifying effect on the profitability of the company. As a result, a high degree of financial leverage is likely to result in a large change in earnings per share.

A High Degree of Financial Leverage Means That a Small