A 20% increase in sales causes EPS to rise from $4.00 to $6.50.Assuming the firm has no debt,what is its degree of operating leverage (DOL)?
A) 1.00
B) 1.50
C) 1.57
D) 3.13
E) 2.25

Question

Quizplus · Accepted Answer

DOL = 11ea7fdb_fc58_6bc5_a768_0bf4298a8a75_TB2902_11 EPS = (EBIT - Interest) × (1 - T) / #Shares
If Interest = 0, then EPS = EBIT × (1 - T) / #Shares. Since the tax rate and the number of shares don't change, then % change in EPS = % change in EBIT.
%ΔEPS = 11ea7fdb_fc58_6bc6_a768_05672ec5dae3_TB2902_11 = 0.625
%ΔSales = 20%
DOL = 11ea7fdb_fc58_6bc7_a768_a59da9583c9b_TB2902_11 = 3.125 or 3.13

A 20% Increase in Sales Causes EPS to Rise from $4.00