What does a degree of financial leverage (DFL) of 2.0 indicate?
A)For every 1 percent change in its sales, the firm's EBIT will change by 2 percent.
B)For every 1 percent change in its EPS, the firm's sales will change by 0.5 percent.
C)For every 1 percent change in its EBIT, the firm's EPS will change by 2 percent.
D)For every 1 percent change in its EPS, the firm's EBIT will change by 0.5 percent.
E)For every 1 percent change in its EBIT, the firm's 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, the firm's EPS will change by 2 percent. This means that the firm has a high level of financial leverage, relying heavily on debt financing, and any changes in operating profits will have a magnified impact on its earnings per share (EPS).

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