cfa- corporate finance

priyakamboj1985
Posts: 1
Joined: Wed Jan 29, 2014 9:41 am

cfa- corporate finance

Postby priyakamboj1985 » Wed Jan 29, 2014 9:46 am

Q. if a 10 % increase in sales causes EPS to increase from $1.00 to $1.50 and if the firm uses no debt,then what is the degree of operating leverage ?

please give the answer in detail because its confusing

pradeeppdy
Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm

cfa- corporate finance

Postby pradeeppdy » Tue Feb 04, 2014 7:19 am

In this example firm is not using any kind of debt and it seems there is no financial leverage.

So, here we can say DOL and DTL is same.

DTL = % change in EPS/ %change in sales = 50%/10%= 5(ANS)

pradeeppdy
Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm

cfa- corporate finance

Postby pradeeppdy » Wed Apr 02, 2014 7:16 am

For a 10% increase sales , the EPS increases by 50% . And the firm uses no leverage that means there is no debt burden on the firm . The ans is (1.5-1.00) / 0.1 = 5


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