If a firm's EBIT changes by 20% and it has a degree of financial leverage (DFL)of 2.0, what is the expected change in earnings per share (EPS)?
A)20%
B)40%
C)50%
D)60%

Question

Quizplus · Accepted Answer

The expected change in earnings per share (EPS) can be calculated using the degree of financial leverage (DFL) formula: % Change in EPS = DFL * % Change in EBIT. Given a DFL of 2.0 and a 20% change in EBIT, the expected change in EPS is 2.0 * 20% = 40%.

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