Which leverage metric measures the percentage change in Earnings Per Share (EPS) resulting from a percentage change in Earnings Before Interest and Taxes (EBIT)?
ADegree of Operating Leverage (DOL)
BDegree of Financial Leverage (DFL)
CDegree of Total Leverage (DTL)
DCombined Leverage
Explanation
* Degree of Financial Leverage (DFL) quantifies EPS sensitivity to EBIT changes: DFL = EBIT / (EBIT – Interest).
* High fixed financial charges (interest) increase financial risk and DFL volatility.
* DOL measures operating profit response to sales revenue fluctuations.
Exam Relevance
- Topic: Financial Management
- Subtopic: Leverage Analysis
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