The correct answer is: C. If sales rise by 1%, EBIT will rise by 2.8%.
DOL stands for Degree of Operating Leverage. It is a measure of how sensitive a company’s operating income (EBIT) is to changes in sales. A higher DOL indicates that a company’s EBIT is more sensitive to changes in sales.
A company with a DOL of 2.8 means that if sales increase by 1%, EBIT will increase by 2.8%. This is because a company with a high DOL has a high proportion of fixed costs. When sales increase, the company’s fixed costs do not change, so the company’s EBIT increases by a larger percentage than the increase in sales.
Option A is incorrect because it states that if sales increase by 2.8%, EBIT will increase by 1%. This is not necessarily the case. If a company has a high DOL, then EBIT will increase by more than 1% if sales increase by 2.8%. However, if a company has a low DOL, then EBIT may not increase at all if sales increase by 2.8%.
Option B is incorrect because it states that if EBIT increases by 2.896, the EPS will increase by 1%. This is not necessarily the case. The EPS is calculated by dividing EBIT by the number of shares outstanding. If a company has a high DOL, then EBIT will increase by more than 1% if sales increase by 2.896. However, if a company has a low DOL, then EBIT may not increase at all if sales increase by 2.896.
Option D is incorrect because it states that none of the above is true. However, option C is true.