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CMA Intermediate · Financial Management and Business Data Analytics · Leverage Analyses and EBIT - EPS Analysis

Anand Engineering has a DOL of 3 and a DFL of 1.5. If sales rise by 10%, by what percentage will EPS rise, assuming the leverage figures hold?

EPS rises by 45%. Combined leverage is DOL 3 multiplied by DFL 1.5, giving 4.5, and a 10% sales rise therefore changes EPS by 4.5 times 10 percent. Using DOL alone would give only 30%.

  1. A45%Correct
  2. B30%
  3. C15%
  4. D4.5%

Explanation

Combined leverage = DOL x DFL = 3 x 1.5 = 4.5. EPS change = 4.5 x 10% = 45%. The 30% option ignores financial leverage, which only reflects the EBIT change.

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