Which of the following statements concerning a firm's degree of financial leverage (DFL) is correct?
A)The DFL affects the earnings before interest and taxes of the firm.
B)The DFL is defined as the percentage change in net operating income that results from a given percentage change in sales.
C)A lower DFL suggests that higher risk is associated with the firm's normal operating activities.
D)The DFL directly affects the operating section of the income statement.
E)A higher DFL suggests that higher risk is associated with the firm's mix of debt and equity financing.

Question

Quizplus · Accepted Answer

The Degree of Financial Leverage (DFL) measures the sensitivity of a firm's earnings per share (EPS) to fluctuations in its operating income, based on the structure of its capital (debt and equity). A higher DFL indicates that a firm has a higher proportion of debt in its capital structure, which increases financial risk because the firm must meet fixed interest payments regardless of its operating performance.

Which of the Following Statements Concerning a Firm's Degree of Financial