Question

"The degree of financial leverage is the ratio of​" ________ to percentage change in EBIT. A. operating profit B. percentage change in sales C. longminus term debt D. percentage change in EPS

Answer 1

Answer:

D. percentage change in EPS

Explanation:

Leverage is an investment strategy of using borrowed money specifically, the utilization of varied financial instruments or borrowed capital to increase the potential return of an investment. Leverage also can be the quantity of debt a firm uses to finance assets. When one refers to a corporation , property or investment as "highly leveraged," it means item has more debt than equity.

The concept of leverage is employed by both investors and corporations . Investors use leverage to significantly increase the returns which will be provided on an investment. They lever their investments by using various instruments that include options, futures and margin accounts. Companies can use leverage to finance their assets. In other words, rather than issuing stock to boost capital, companies can use debt financing to take a position in business operations in an effort to extend shareholder value.

One can calculate the degree of operating leverage by dividing the share change of a company's earnings per share (EPS) by its percentage (%) change in its earnings before interest and taxes (EBIT) over a period.

A better degree of operating leverage shows a better level of volatility during a company's EPS.

Answer 2

Answer:

The correct answer is D. percentage change in EPS.

Explanation:

The degree of operating leverage and the degree of financial leverage are two indicators used in the fundamental analysis to determine the sensitivity of income in relation to fluctuations in another variable. The degree of operating leverage quantifies the relationship between earnings before interest and taxes (EBIT), while the degree of financial leverage quantifies the relationship between earnings per share (EPS) and EBIT.

Financial leverage consists of the use of external funds of the company to allocate to investments. To put it another way, the investor increases the amount invested by using external resources (debts) that is added to the own resources in order to obtain greater profitability by increasing the total amount invested.