Home › CA Inter › Financial Management › Financial Leverage › Financial Leverage measures the relationship bet…
Financial Leverage measures the relationship between:
AEBIT and EPS
BSales and EBIT
CSales and EPS
DProfit and dividend
Answer & Solution
Correct answer: A. EBIT and EPS
1. Financial Leverage measures sensitivity of EPS to changes in EBIT.
2. DFL = %ΔEPS / %ΔEBIT = EBIT / (EBIT − I − Pref div/(1−t)).
3. Indicates financial risk.
_Source: ICAI BoS CA Inter Paper 6A, Ch 6 "Financing Decisions — Leverages", §4_
Related questions
Financial Leverage is described as a "double-edged sword" because:For DFL calculation when preference dividend exists, the denominator uses:A firm has DFL = 2 and EBIT falls by 10%. EPS will change by:Financial Leverage is also called:If a company has no debt, what is the Financial Leverage?A change in EPS due to a unit change in EBIT is captured by:EBIT ₹6 lakh; Interest ₹2 lakh. Degree of Financial Leverage is: