If the degree of accounting leverage is 1.3 for a company, then a 10 per cent increase in revenue should drive a
A) 13% increase in pretax operating cash flows.
B) 13% increase in EBIT.
C) 30% increase in EBIT.
D) none of the above.

Question

Quizplus · Accepted Answer

The degree of accounting leverage measures the sensitivity of a company's earnings before interest and taxes (EBIT) to changes in revenue. A degree of accounting leverage of 1.3 means that for every 1% increase in revenue, EBIT should increase by 1.3%.

Therefore, a 10% increase in revenue should drive a 13% increase in EBIT (10% x 1.3). Therefore, option B is the correct choice.

If the Degree of Accounting Leverage Is 1