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Degree of Financial Leverage (DFL): F. All are true statements except B B. As EBIT gets...

Degree of Financial Leverage (DFL):

F. All are true statements except B

B. As EBIT gets larger, DFL gets smaller

C. DFL is directly related to financial risk

A. All equity firm has DFL = 1

D. Ignoring taxes, DFL = Equity multiplier

E. All are true statements

Solutions

Expert Solution

The answer is

E. ALL ARE true

Degree of financial leverage = EBIT/EBT

With no debt, DFL will be equal to 1

Equity multiplier = EBIT/net income

Hence, with no taxes it will be equal to DFL

As EBIT gets larger, EBT will also get larger as interest will be fixed and hence DFL will be smaller

jeff jeffy answered 2 years ago
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