- CFA Exams
- CFA Level I Exam
- Study Session 11. Corporate Finance (2)
- Reading 34. Measures of Leverage
- Subject 1. Business Risk and Operating Leverage
CFA Practice Question
Your firm's EPS last year was $1.00. You expect sales to increase by 15 percent during the coming year. If your firm has a degree of operating leverage equal to 1.25 and a degree of financial leverage equal to 3.50, what is its expected EPS?
A. $1.6563
B. $2.5843
C. $1.3481
Explanation: EPS(0) = $1.00. DOL = 1.25. EPS(1) = ?
%Change S = 15%. DFL = 3.50
DTL = DOL(DFL) = 1.25(3.50) = 4.375
EPS(1) = EPS(0)[1.0 + (DTL)(%Change Sales)] = $1.00[1.0 + (4.375)(0.15)] = $1.00[1.6563] = $1.6563
%Change S = 15%. DFL = 3.50
DTL = DOL(DFL) = 1.25(3.50) = 4.375
EPS(1) = EPS(0)[1.0 + (DTL)(%Change Sales)] = $1.00[1.0 + (4.375)(0.15)] = $1.00[1.6563] = $1.6563
User Contributed Comments 3
| User | Comment |
|---|---|
| danlan | Simply use 1+0.15*1.25*3.5=1.65625 |
| AkashKB | Thats what I did by guess |
| Eoghan | You ledgeball! |