Homework Answers
Degree of financial leverage =
%Change in EPS/%Change in EBIT
It is also equal to (EBIT/EBIT - Interest)
EBIT or Earnings before interest and tax is the Operating income for a firm.
Degree of financial leverage measures the sensitivity of a firm's earnings per share to changes in operating income.
EBIT = Sales -Total variable cost - Total fixed cost
EBIT = 7,000,000 - 3,000,000-1,500,000
EBIT = $2,500,000
Thus, Degree of financial leverage = EBIT/(EBIT-interest) = 2,500,000/(2,500,000-480,000) = 1.23762376
Also, Degree of financial leverage = %Change in EPS/% Change in EBIT
Thus, 1.23762276 = % Change in EPS/0.07
%Change in EPS = 8.6634%
Thus, option b is correct. 8.7% should be the increase in earnings per share.
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