- CFA Exams
- CFA Level I Exam
- Topic 4. Corporate Issuers
- Learning Module 35. Measures of Leverage
- Subject 2. Financial Risk and Financial Leverage

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**CFA Practice Question**

A firm has EBIT of $20 million, interest expense of $8 million, and faces a tax rate of 40 percent. There are 15 million shares outstanding. The increase in EPS resulting from a 10% increase in EBIT would be closest to a ______ increase.

B. 14%

C. 17%

A. 10%

B. 14%

C. 17%

Correct Answer: C

The EPS is currently [($20 - $8) x (1 - .4)]/15 = $0.48 per share. If EBIT increased to $22 million, the EPS would be [($22 - $8) x (1 - .4)]/15 = $0.56 per share. The change in EPS would be a 17% increase.

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**User Contributed Comments**
11

User |
Comment |
---|---|

rockeR |
How about this method? EBIT/(EBIT-I)=(%change in EPS)/(%change in EBIT) So, 20/(20-8)=X/10% Hence, X=%change in EPS=0.166x=17% increase |

xiong |
It is a good idea to use DFL |

katybo |
is the best way... |

MaiHuong |
Another method DFL = EBIT/(EBIT-Interest) = 20/12 = 1.667 DFL = %change of net income/%change of operating income EBIT increase 10% --> net income increase 1.667*0.1 = 16.7% nuber of stock remain --> EPS increase 16.7% |

auhjpps |
yeah the method used by maihoung is the better one |

2014 |
good solution maihuong |

johntan1979 |
Yeah, I used the DFL method too. So much faster. |

jonan203 |
i love how they give us the DFL formula and use a method that takes ten times longer to get the same answer |

leon121 |
good job maihuong |

cfastudypl |
Both rockeR and MaiHuong methods are one and the same and is the same method I used. AN method for this question is long and will waste your time in the exam. In any case, use the method you understand best. |

walterli |
easy one? 20*10%/?20-8?=16.67% |