A firm expects to have a 15 percent increase in sales over the coming year. If it has operating leverage equal to 1.25 and financial leverage equal to 3.50, then what will be the percentage change in earnings per share (EPS)?
A) 30%
B) 47%
C) 66%
D) 15%
E) 22%

Question

Quizplus · Accepted Answer

The formula for calculating the percentage change in EPS is: 
%ΔEPS = %ΔSales * (1+Operating Leverage) * (1+Financial Leverage) -1 
%ΔSales = 15%

Plugging in the given values:

%ΔEPS = 15% * (1+1.25) * (1+3.50) - 1 
%ΔEPS = 15% * 2.25 * 4.50 - 1 
%ΔEPS = 66%

Therefore, the percentage change in EPS will be 66%, which corresponds to option C.

A Firm Expects to Have a 15 Percent Increase in Sales