Question

A​ 20% increase in sales causes EPS to rise from​ $4.00 to​$6.50. Assuming the firm has no​ debt, what is its degree of operating leverage​ (DOL)?

A. 3.13 B. 2.25 C. 1.50 D. 1.57 E. 1.00

Answer 1

A

Step-by-step explanation:

DOL = Percentage change in EBIT / percentage change in sales

EPS = {(EBIT - Interest) × (1 - T) } / Shares

The firm has no debt, so interest would be zero

EPS = EBIT × (1 - T) / Shares.

Tax rate and number of outstanding shares remain unchanged.

Percentage Change in EPS = EBIT.

Percentage Change in EPS = (6.5 / 4) - 1 = 0.625 = 62.5%

EBIT = 62.5%

Percentage change in sales= 20%

DOL = 62.5% / 20% = 3.13