Which of the following mathematical expressions is used to compute the degree of financial leverage (DFL) at a particular level of earnings before interest and taxes (EBIT)? Assume the firm has no preferred stock.
A)DFL = Earnings before interest and taxes ÷ Earnings per share (EPS)
B)DFL = Gross profit ÷ Earnings before interest and taxes
C)DFL = Sales ÷ (Earnings before interest and taxes - Interest)
D)DFL = Earnings before interest and taxes ÷ (Earnings before interest and taxes - Interest)
E)DFL = (Earnings before interest and taxes - Interest - Taxes) ÷ Number of shares

Question

Which of the following mathematical expressions is used to compute the degree of financial leverage (DFL) at a particular level of earnings before interest and taxes (EBIT)? Assume the firm has no preferred stock. 
A)DFL = Earnings before interest and taxes ÷ Earnings per share (EPS)
B)DFL = Gross profit ÷ Earnings before interest and taxes
C)DFL = Sales ÷ (Earnings before interest and taxes - Interest)
D)DFL = Earnings before interest and taxes ÷ (Earnings before interest and taxes - Interest)
E)DFL = (Earnings before interest and taxes - Interest - Taxes) ÷ Number of shares

Quizplus · Accepted Answer

The degree of financial leverage (DFL) is calculated as the percentage change in earnings per share (EPS) for a one percent change in earnings before interest and taxes (EBIT). It is used to measure the sensitivity of EPS to changes in EBIT. The formula for DFL is given as DFL = Earnings before interest and taxes ÷ (Earnings before interest and taxes - Interest).

Which of the Following Mathematical Expressions Is Used to Compute