- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Investments
- Learning Module 5. Company Analysis: Past and Present
- Subject 5. Capital Investments and Capital Structure
CFA Practice Question
The greater the percentage of assets financed by debt, the more sensitive EPS is to any change in ______.
B. operating leverage
C. sales
A. variable financing receipts
B. operating leverage
C. sales
Correct Answer: C
Financial leverage increases the sensitivity of EPS to changes in EBIT and sales.
User Contributed Comments 4
| User | Comment |
|---|---|
| setmefree | TDL (total degree of leverage) = DOL*DFL(financial leverage), TDL measures sensitivity of changes in EPS in response to changes in sales; assume a constant degree of leverage, higher DFL indicates higher TDL |
| Khadria | DTL = DOL * DFL = (Delta EBIT / Delta Sales) * (Delta EPS / Delta EBIT) = Delta EPS / Delta Sales |
| kodali | Doesn't real costs affect EBIT |
| myron | yes real costs affect EBIT but it has nothing to do with financing which this question asks. |