Question

A firm has the following information for the last two years – all amounts are in U.S. dollars.

                                                This year         Last year

                                                2019                2018   

            Revenues                    99,000             90,000

            EBIT                            33,000             30,000

            EAT                             16,500             15,000

            EPS                             1.80                 1.50    

This firm’s Degree of Financial Leverage is:

	a.	1
	b.	3
	c.	2
	d.	none of the above

Answer 1

% change in EPS = (EPS in this year - EPS last year)/EPS last year

=(1.80-1.50)/1.5

=0.20 or 20%

% change in EBIT = (Ebit in this year - Ebit last year)/Ebit last year

=(33000-30000)/30000

=0.1 or 10%

Degree of financial leverage = % change in EPS/% change in EBIT

=20%/10%

=2

So degree of financial leverage is 2