Understanding the Degree of Financial Leverage

C

The degree of financial leverage is defined as the percentage change in EPS for a 1% change in EBIT.

The degree of financial leverage (DFL) measures the sensitivity of earnings per share (EPS) to changes in earnings before interest and taxes (EBIT). It helps assess the impact of changes in operating income on the profitability and risk of a company.

Option A states that the degree of financial leverage is the change in EPS for a unit change in EBIT. This is incorrect because the DFL measures the percentage change in EPS, not the absolute change, in response to a change in EBIT.

Option B states that the degree of financial leverage is the percentage change in EBIT for a 1% change in EPS. This is also incorrect. The DFL is focused on the relationship between changes in EBIT and changes in EPS, not the other way around.

Option D suggests that the degree of financial leverage is the percentage change in EBIT for a 1% change in the quantity sold. This is not accurate either. The DFL is specifically concerned with the relationship between changes in EBIT and changes in EPS, not changes in quantity sold.

Therefore, the correct answer is C: None of these answers. None of the options accurately defines the degree of financial leverage.