Doberman Company has a degree of financial leverage of 2.5. This means that a:
A) 1 percent change in operating earnings will result in a 2.5 percent change in net income.
B) 1 percent change in units produced and sold will result in a 2.5 percent change in net income.
C) 1 percent change in units produced and sold will result in a 2.5 percent change in earnings per share.
D) 1 percent change in units produced and sold will result in a 2.5 percent change in operating earnings.

Question

Quizplus · Accepted Answer

The degree of financial leverage measures the sensitivity of a company's net income to changes in its operating income. Therefore, a degree of financial leverage of 2.5 means that a 1 percent change in operating earnings (or operating income) will result in a 2.5 percent change in net income.

Doberman Company Has a Degree of Financial Leverage of 2