Question

"If a firm has a DFL of 2.0, EPS will change 2% for every 1% change in volume.

A True
B False"

Answer 1

The DFL of a firm determines the relationship between changes in volume and EPS. In this case, the DFL of 2.0 indicates that EPS will change by 2% for every 1% change in volume, making the statement True.

Step-by-step explanation:

The subject of this question is Business and it is at the College level. The question is asking about the DFL (Degree of Financial Leverage) and its relationship with EPS (Earnings Per Share) in response to changes in volume.

The answer to the question is True. If a firm has a DFL of 2.0, it means that for every 1% change in volume, the EPS will change by 2%. This indicates that the firm's earnings are sensitive to changes in volume.

For example, if the volume increases by 5%, the EPS would increase by 5% * 2% = 10%. Similarly, if the volume decreases by 3%, the EPS would decrease by 3% * 2% = 6%.