If a firm\'s degree of financial leverage (DFL) is 3, how will a 3% increase in

Question

If a firm's degree of financial leverage (DFL) is 3, how will a 3% increase in earnings before interest and taxes (EBIT) affect earnings per share (EPS)? (Points : 5)

EPS will rise 3%.

EPS will rise 9%.

EPS will rise 27%.

DFL will not affect this relationship

       -$2,000
       $2,000
       $10,000
       $22,000

       $98.
       $108.
       $119.
       $129.

What is the net present value of a $10,000 initial investment with future cash flows that have a present value of $12,000? (Points : 5)

Explanation / Answer

DFL = Change in EPS / Change in EBIT

3 = Change in EPS / 3%

Change in EPS = 9%

EPS will rise 9%.

NPV = PV - Initial Investment = 12000 - 10000 = $ 2000

FV = PV * (1 +r) ^ n = 100 * (1.06)^3 = 119.10 = $ 119

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.