CFA Practice Question

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CFA Practice Question

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

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.

User Contributed Comments 9

User Comment
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!!!
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