A firm expects to have a 15 percent increase in sales this year. If its degree of operating leverage is 1.2 and its degree of financial leverage is 3.5, what will be the percentage change in earnings per share (EPS) this year?
A)4.2%
B)48.05%
C)63.0%
D)52.5%
E)18.0%

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) measures the sensitivity of earnings before interest and taxes (EBIT) to changes in sales. The degree of financial leverage (DFL) measures the sensitivity of EPS to changes in EBIT. The formula for calculating the percentage change in EPS is:% Change in EPS = % Change in Sales * DOL * DFLIn this case, the firm expects to have a 15 percent increase in sales, the DOL is 1.2, and the DFL is 3.5. Therefore, the percentage change in EPS is:% Change in EPS = 15% * 1.2 * 3.5 = 63.0%Therefore, the correct answer is C) 63.0%.

A Firm Expects to Have a 15 Percent Increase in Sales