Final answer:
The degree of financial leverage is concerned with the relationship between changes in EBIT and changes in EPS. This measures how a company's reliance on debt affects its earnings per share.
Step-by-step explanation:
The degree of financial leverage is concerned with the relationship between changes in EBIT (Earnings Before Interest and Taxes) and changes in EPS (Earnings Per Share).
The degree of financial leverage measures how much a company relies on debt to finance its operations and how changes in operating income or EBIT affect the earnings per share of the company's stock.
For example, if a company has a high degree of financial leverage and experiences a small increase in EBIT, the increase in earnings per share can be significantly higher due to the effect of the fixed interest expenses. On the other hand, if the company's EBIT decreases, the decline in earnings per share can be steeper due to the fixed interest expenses.