US CMA Part 2 · Chapter 1 · Question 13 of 15
Kessler Manufacturing has EBIT of $500,000 and interest expense of $100,000. It has no preferred stock. If EBIT increases by 8%, by approximately what percentage will earnings per share increase?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) 10.0%
Explanation
Degree of financial leverage (DFL) = EBIT / (EBIT - interest) = $500,000 / $400,000 = 1.25. The percentage change in EPS = DFL x percentage change in EBIT = 1.25 x 8% = 10.0%. Because interest is fixed, EPS changes proportionally more than EBIT.
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