Archive Storage earned $3.20 a share on sales of $13.6 million. Archive has determined that its degree of operating leverage is 1.87 and its degree of financial leverage is 2.91. If sales are expected to increase 15%, what will be the EPS forecast?
A) $2.61
B) $4.60
C) $5.81
D) $3.68

Question

Quizplus · Accepted Answer

The percentage change in EPS can be calculated by multiplying the percentage change in sales by the degree of total leverage (operating leverage * financial leverage). The degree of total leverage is 1.87 * 2.91 = 5.44. Therefore, a 15% increase in sales results in an 81.6% increase in EPS (15% * 5.44). The new EPS is $3.20 * (1 + 0.816) = $5.81.

Archive Storage Earned $3