Measures financial risk of the firm
Is zero at financial break-even point
Increases as EBIT increases
Both a and b
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Answer is Wrong!
The correct answer is: Both a and b.
The degree of financial leverage (DFL) measures the extent to which a firm’s earnings per share (EPS) change in response to a change in its EBIT. It is calculated as follows:
$$DFL = \dfrac{EBIT}{EPS}$$
The DFL is zero at the financial break-even point, which is the point at which EBIT is equal to zero. This is because at the financial break-even point, there is no profit or loss, so EPS is also zero.
The DFL increases as EBIT increases. This is because as EBIT increases, EPS increases by a greater
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