If a firm's EBIT changes by 20% and it has a degree of financial leverage (DFL)of 2.5, what is the expected change in earnings per share (EPS)?
A)20%
B)40%
C)50%
D)60%

Question

Quizplus · Accepted Answer

The formula for calculating the change in EPS is: 
% Change in EPS = % Change in EBIT x DFL

Given that % Change in EBIT = 20% and DFL = 2.5, 
% Change in EPS = 20% x 2.5 = 50%

Therefore, the expected change in EPS is 50%. Hence, option C is the correct answer.

If a Firm's EBIT Changes by 20% and It Has