Assume you are reviewing a graph that plots earnings per share (EPS) against earnings before interest and taxes (EBIT). The steeper the slope of the plotted line the:
A) lower the impact of financial leverage.
B) lower the debt-equity ratio.
C) higher the tax rate.
D) greater the sensitivity of EPS to changes in EBIT.
E) lower the probability of a negative EPS.

Question

Quizplus · Accepted Answer

The steeper the slope of the plotted line, the greater the sensitivity of EPS to changes in EBIT. This suggests that even small changes in EBIT can have a significant impact on EPS. This is an indication of the degree of financial leverage used by the company, as higher leverage tends to amplify the impact of changes in EBIT on EPS. Therefore, D is the correct answer. The other answer choices are not necessarily related to the slope of the plotted line.

Assume You Are Reviewing a Graph That Plots Earnings Per