If a firm has current earnings per share of $2 and a degree of combined leverage of 4, a 10% increase in sales would result in earnings per share of:
A)$2.80
B)$8
C)$2.20
D)cannot tell from this information

Question

Quizplus · Accepted Answer

The degree of combined leverage (DCL) indicates how a percentage change in sales will affect earnings per share (EPS). A DCL of 4 means that a 10% increase in sales will result in a 40% increase in EPS. Therefore, the new EPS will be $2 + ($2 * 0.40) = $2.80.

If a Firm Has Current Earnings Per Share of $2