10. Which of the following is true of the degree of financial leverage of a firm
ID: 2801846 • Letter: 1
Question
10. Which of the following is true of the degree of financial leverage of a firm? Please explain.
a.
The degree of financial leverage affects the earnings before interest and taxes of the firm.
b.
The degree of financial leverage is defined as the percentage change in net operating income with a given percentage change in sales.
c.
The degree of financial leverage affects the operating section of the income statement.
d.
A higher degree of financial leverage suggests that higher risk is associated with the firm's mix of debt and equity financing.
a.
The degree of financial leverage affects the earnings before interest and taxes of the firm.
b.
The degree of financial leverage is defined as the percentage change in net operating income with a given percentage change in sales.
c.
The degree of financial leverage affects the operating section of the income statement.
d.
A higher degree of financial leverage suggests that higher risk is associated with the firm's mix of debt and equity financing.
Explanation / Answer
d is correct
Degree of financial leverage (DFL) = Change in EPS / Change in EBIT
Change in the capital structure would have the most impact on DFL. When you have higher financial leverage, it implies there is higher risk due to higher leverage.
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