In evaluating a firm's degree of financial leverage, financial risk is ____ with an increase in DFL.
A) increased
B) decreased
C) not impacted
D) reflective of excess inventory

Question

Quizplus · Accepted Answer

The Degree of Financial Leverage (DFL) measures the sensitivity of a company's earnings per share (EPS) to changes in its operating income, and is calculated as % change in EPS divided by % change in operating income. A higher DFL indicates that a company has a higher level of financial leverage, meaning that it relies more on debt financing to fund its operations. As a result, an increase in DFL is associated with increased financial risk, as the company's profits and earnings per share are more sensitive to changes in operating income or interest expenses.

In Evaluating a Firm's Degree of Financial Leverage, Financial Risk