Assume that Herron, Inc. has a degree of financial leverage of 1.50. If EBIT increases from $150,000 this year to $165,000 next year, how much will earnings per share (EPS)increase, assuming no change in capital structure?
A)6.7%
B)10.0%
C)15.0%
D)22.5%
E)Cannot be determined from the information given.

Question

Quizplus · Accepted Answer

The degree of financial leverage (DFL) indicates that for every 1% change in EBIT, EPS will change by 1.50%. The increase in EBIT is ($165,000 - $150,000) / $150,000 = 10%. Therefore, EPS will increase by 10% * 1.50 = 15.0%.

Assume That Herron, Inc