Suppose a firm's degree of financial leverage (DFL) is 1.0. Which of the following statements concerning this firm is correct?
A)The firm must have fixed costs associated with its production process.
B)The firm's earnings per share (EPS) must equal zero.
C)The firm's degree of total leverage (DTL) must equal 1.0.
D)The firm's degree of operating leverage (DOL) must be greater than 1.0.
E)The firm has no long-term debt, preferred stock, or other sources of financing that require fixed payments.

Question

Quizplus · Accepted Answer

A firm's degree of financial leverage (DFL) measures the sensitivity of earnings per share (EPS) to changes in earnings before interest and taxes (EBIT). A DFL of 1.0 implies that the firm has no long-term debt, preferred stock, or other sources of financing that require fixed payments. Therefore, choice E is the correct answer. Choices A, B, C, and D are incorrect because they do not necessarily follow from a DFL of 1.0.

Suppose a Firm's Degree of Financial Leverage (DFL) Is 1