Dakota Oil,Inc.reported that its sales and EBIT increased by 10%,but its EPS increased by 30%.The much larger change in earnings per share could be the result of
A) high operating leverage.
B) high financial leverage.
C) a high percentage of credit sale collections from prior years.
D) high fixed costs of production.

Question

Quizplus · Accepted Answer

The much larger increase in EPS compared to sales and EBIT suggests that Dakota Oil has high financial leverage, meaning it has a significant amount of debt financing. This results in a higher proportion of earnings available to common shareholders due to the effects of financial leverage. High operating leverage (choice A) would have affected both sales and earnings similarly, while credit sale collections (choice C) and fixed costs of production (choice D) would not have had such a substantial impact on EPS.