Which of the following ratios give a perspective on risk in the capital structure?
A) Book value per share
B) Price/earnings ratio
C) Degree of financial leverage
D) Dividend yield

Question

Quizplus · Accepted Answer

The degree of financial leverage (DFL) is a ratio that measures the sensitivity of earnings per share (EPS) to changes in earnings before interest and taxes (EBIT). A higher DFL indicates higher financial risk, as a small change in EBIT can result in a larger change in EPS. Thus, DFL gives a perspective on risk in the capital structure. Book value per share, price/earnings ratio, and dividend yield do not directly provide information on risk in the capital structure.

Which of the Following Ratios Give a Perspective on Risk