9 dfl percentage change in eps percentage change in

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Unformatted text preview: 6) Whenever the percentage change in EPS resulting from a given percentage change in EBIT is greater than the percentage change in EBIT, financial leverage exists. This means that whenever DFL is greater than 1, there is financial leverage. 9. This approach is valid only when the same base level of EBIT is used to calculate and compare these values. In other words, the base level of EBIT must be held constant to compare the financial leverage associated with different levels of fixed financial costs. 518 PART 4 Long-Term Financial Decisions EXAMPLE Applying Equation 12.6 to cases 1 and 2 in Table 12.6 yields Case 1: Case 2: 100% 40% 100% 40% 2.5 2.5 In both cases, the quotient is greater than 1, so financial leverage exists. The higher this value, the greater the degree of financial leverage. A more direct formula for calculating the degree of financial leverage at a base level of EBIT is given by Equation 12.7, where the notation from Table 12.6 is used.10 Note that in the denominator, the term 1/(1 T) converts the...
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