Degree of Financial Leverage (DFL) measures the sensitivity of:
AEBIT to changes in sales volume
BEarnings Per Share (EPS) to changes in Operating Income (EBIT)
CSales volume to changes in fixed assets
DNet profit to changes in working capital
Explanation
Core Concept: Degree of Financial Leverage (DFL) = Percentage Change in EPS / Percentage Change in EBIT = EBIT / (EBIT − Interest). It quantifies financial risk stemming from fixed interest expenses. Context/Distractors: Operating leverage measures EBIT response to sales changes. Total leverage combines DOL and DFL. Exam Tip/Key Fact: Higher fixed debt payments result in higher DFL and higher financial risk.
Exam Relevance
- Topic: Corporate Finance
- Subtopic: Financial Leverage
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