40 100 4800 1000 480 100 aas noted in chapter 1

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Unformatted text preview: unting and tax purposes, interest is a tax-deductible expense, whereas dividends must be paid from after-tax cash flows. Case 1 A 40% increase in EBIT (from $10,000 to $14,000) results in a 100% increase in earnings per share (from $2.40 to $4.80). Case 2 A 40% decrease in EBIT (from $10,000 to $6,000) results in a 100% decrease in earnings per share (from $2.40 to $0). The effect of financial leverage is such that an increase in the firm’s EBIT results in a more-than-proportional increase in the firm’s earnings per share, whereas a decrease in the firm’s EBIT results in a more-than-proportional decrease in EPS. Measuring the Degree of Financial Leverage (DFL) degree of financial leverage (DFL) The numerical measure of the firm’s financial leverage. The degree of financial leverage (DFL) is the numerical measure of the firm’s financial leverage. Computing it is much like computing the degree of operating leverage. The following equation presents one approach for obtaining the DFL.9 DFL Percentage change in EPS Percentage change in EBIT (12....
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This document was uploaded on 01/19/2014.

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