It is a basic truth that financial leverage magnifies changes in operating income (EBIT)into larger changes in ROE and EPS. The greater the degree of financial leverage (DFL), the larger the magnification.

Question

Quizplus · Accepted Answer

This is a basic concept of financial leverage. When a company takes on debt to finance its operations, it can increase its potential returns, but it also increases the risk. The degree of financial leverage measures the extent to which a company relies on debt financing, and a higher DFL can lead to greater magnification of changes in EBIT into changes in ROE and EPS.

It Is a Basic Truth That Financial Leverage Magnifies Changes