A 10% increase in sales causes EPS to rise from $0.50 to $0.56.Assuming the firm has no debt,what is its degree of operating leverage (DOL)?
A) 1.00
B) 1.20
C) 0.83
D) 1.50
E) 0.75

Question

Quizplus · Accepted Answer

DOL = 11ea7fdb_fc58_92d8_a768_c1dea0792de5_TB2902_11 EPS = (EBIT - Interest) × (1 - T) / #Shares
If Interest = 0, then EPS = EBIT × (1 - T) / #Shares. Since the tax rate and the number of shares don't change, then % change in EPS = % change in EBIT.
%ΔEPS = 11ea7fdb_fc58_92d9_a768_03cda9c22bbd_TB2902_11 = 12%
%ΔSales = 10%
DOL = 11ea7fdb_fc58_92da_a768_63b7ebe5dcec_TB2902_11 = 1.2

A 10% Increase in Sales Causes EPS to Rise from $0.50