The sensitivity of net income to changes in operating earnings, influenced by the use of debt, relative to equity, as a source of capital is best described as:
A) indifference point.
B) degree of total leverage.
C) degree of financial leverage.
D) degree of operating leverage.

Question

Quizplus · Accepted Answer

The degree of financial leverage measures the sensitivity of net income to changes in operating earnings, influenced by the use of debt relative to equity. It quantifies how changes in EBIT (Earnings Before Interest and Taxes) affect the earnings available to equity shareholders.

The Sensitivity of Net Income to Changes in Operating Earnings