Last year Alpine Growers experienced a 34% increase in earnings per share on 11% increase in sales. If management knows that Alpine's DOL is 1.5, what is its DFL?
A) 3.09
B) 2.06
C) 3.55
D) 1.67

Question

Quizplus · Accepted Answer

DOL (Degree of Operating Leverage) = % Change in Earnings Before Interest and Taxes (EBIT) / % Change in Sales

Therefore, DOL = 34% / 11% = 3.09

DFL (Degree of Financial Leverage) = % Change in Earnings Per Share (EPS) / % Change in EBIT

DFL = 34% / (1.5 * 11%) = 2.06

Therefore, the answer is B.

Last Year Alpine Growers Experienced a 34% Increase in Earnings