The correct answer is: C. sensitivity of EPS with respect to % change in level of EBIT.
Financial leverage is a measure of how much debt a company uses to finance its assets. A high degree of financial leverage means that a company has a lot of debt, and a low degree of financial leverage means that a company has very little debt.
The sensitivity of EPS with respect to % change in level of EBIT is a measure of how much a company’s earnings per share (EPS) will change for every 1% change in its earnings before interest and taxes (EBIT). A high degree of financial leverage means that a company’s EPS will be more sensitive to changes in EBIT, and a low degree of financial leverage means that a company’s EPS will be less sensitive to changes in EBIT.
Here is a brief explanation of each option:
- Option A: sensitivity of EBIT with respect of % change with respect to output. This is not a measure of financial leverage. Financial leverage measures how much debt a company uses to finance its assets, not how sensitive a company’s EBIT is to changes in output.
- Option B: % variation in the level of production. This is also not a measure of financial leverage. Financial leverage measures how much debt a company uses to finance its assets, not how much the level of production varies.
- Option C: sensitivity of EPS with respect to % change in level of EBIT. This is the correct answer. Financial leverage measures how much debt a company uses to finance its assets, and the sensitivity of EPS with respect to % change in level of EBIT is a measure of how much a company’s EPS will change for every 1% change in its EBIT.
- Option D: no change with EBIT and EPS. This is also not a measure of financial leverage. Financial leverage measures how much debt a company uses to finance its assets, and it does not measure how EBIT and EPS change.