Question

Dakota​ Oil, Inc. reported that its sales and EBIT increased by​ 10%, but its EPS increased by​ 30%. The much larger change in earnings per share could be the result of A. high financial leverage. B. high operating leverage. C. a high percentage of credit sale collections from prior years. D. high fixed costs of production.

Answer 1

A. high financial leverage

Step-by-step explanation:

Financial leverage is using debt more than equity. In that case the EBIT is high, but as there is tax benefit on interest expense the earnings per share also with a greater rate than the rate of increase in EBIT.

As with low financial leverage, Number of equity shares will be more, as equity is more than debt accordingly even with high profit the EPS is low.

On the other hand, with high financial leverage the number of equity shares is low as compare to low financial leverage, and accordingly earnings per share is more with high financial leverage.