- CFA Exams
- CFA Exam: Level I 2021
- Study Session 11. Corporate Finance (2)
- Reading 34. Measures of Leverage
- Subject 2. Financial Risk and Financial Leverage

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**CFA Practice Question**

When there is zero financial leverage, a 10 percent change in EBIT will results in a ______.

B. 10% change in EPS

C. greater than 10% change in EPS

A. less than 10% change in EPS

B. 10% change in EPS

C. greater than 10% change in EPS

Correct Answer: B

If there is no financial leverage, then a given percentage change in EBIT will result in the same percentage change in EPS.

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**User Contributed Comments**
9

User |
Comment |
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kalps |
Why is the calculation of EPS given as so: (EBIT-I)(1-t)/Number of shares Per our notes EPS = EBIT/Number of shares ??? Please respond if anyone knows, thanks |

stefdunk |
try re-writing the equation: EPS=[(EBIT-I)/# shares](1-T) so, we can ignore the tax rate in this equation. |

katybo |
if there is no debt you only have operating leverage |

gullan |
If there is zero financial leverage then DFL=1. It means there is no variablity in net income with respect to debt financing. |

julescruis |
The question assumes there is no tax impact. Normally a 10% increase in EBIT would generate an increase in EPS of 10% x (1-tax) |

steved333 |
Even if there is a tax impact, it would still result in a 10% increase because there's no interest impact. |

GIJCFA |
Zero financial leverage = Zero debt = Zero interest. DFL = EBIT/EBIT - I. I=0 hence DFL =1 %change in EPS = %change in EBIT * DFL |

johntan1979 |
The correct formula is %change in EPS = %change in EBIT x (1-t)/N (1-t)/N is a constant, so %change in EPS = %change in EBIT, if no financial leverage. |

walterli |
there is no interest payment!!! |