- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 6. Capital Structure
- Subject 2. Factors Affecting Capital Structure
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.
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!!! |