What does a degree of financial leverage (DFL) of 2.0 indicate?
A) For every 1 percent change in sales, the EBIT will change by 2 percent.
B) For every 1 percent change in EPS, the sales will change by 2 percent.
C) For every 1 percent change in EBIT, the EPS will change by 2 percent.
D) For every 1 percent change in EPS, the EBIT will change by 2 percent.
E) For every 1 percent change in EBIT, the sales will change by 2 percent.

Question

Quizplus · Accepted Answer

A degree of financial leverage (DFL) of 2.0 indicates that for every 1 percent change in EBIT (earnings before interest and taxes), the EPS (earnings per share) will change by 2 percent. This means that as EBIT increases, EPS will increase by a larger percentage due to the higher leverage. However, if EBIT decreases, EPS will decrease by a larger percentage due to the higher leverage.

What Does a Degree of Financial Leverage (DFL) of 2