The degree of financial leverage is measured by relating the percentage change in earnings per share to the percentage change in:
A)sales.
B)EBIT.
C)debt ratio.
D)share price.

Question

Quizplus · Accepted Answer

The degree of financial leverage is measured using the percentage change in EBIT (earnings before interest and taxes) because EBIT is the amount of profit that remains after deducting all operating expenses, except for interest and taxes. By relating the percentage change in earnings per share to the percentage change in EBIT, it can be determined how much the company's profitability changes as a result of changes in its operating income.

The Degree of Financial Leverage Is Measured by Relating the Percentage