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3. If a firm has a degree of financial
leverage (DFL) that is greater than 1.0, then we know that a 1.0 percent change
in ______ will cause a change in ______ that is ______ 1.0 percent.
a. EBIT;
sales; greater
b. sales;
net income; greater
c. sales;
EBIT; less than
d. sales;
EBIT; greater than
e. EBIT;
net income; less
According to its definition, DFL represents the percentage change
in EPS that results from a 1 percent change in EBIT (or NOI). Therefore, if DFL
> 1.0, then a 1 percent change in EBIT will cause a change in EPS that is
greater than 1 percent. As a result, even if the firm does not have operating
leverage, in which case a 1 percent change in sales results in a 1 percent
change in EBIT, when DFL > 1.0, a 1.0 percent change in EBIT results in a
greater than 1 percent change in EPS, and thus a 1 percent change in sales
results in a greater than 1 percent change in EPS.
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