Homework Answers
Answer: Option A is correct.
Degree of operating leverage=(Percentage change in
EBIT)/(Percentage change in sales)
Percentage change in sales= -7% (Negative sign shows
decrease in sales)
We need to calculate the change in the operating cash flows next
year (percentage change in EBIT)=?
Given that the degree of operating leverage=2.8
So, 2.8=Percentage change in EBIT/(-7%)
=>Percentage change in EBIT=2.8*(-7%)=-19.60%
The value -19.60% shows that there will be a decrease in the change
in the operating cash flows next year.
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