Financial Leverage is zero if ____________.

EBIT = Interest

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EBIT = Zero

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EBIT = Fixed Cost

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EBIT = Pref. Dividend

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Solution

The correct option is C EBIT = Zero
Financial leverage is the degree to which a company uses fixed-income securities such as debt and preferred equity. The effect of financial leverage emerges if a company uses debt financing. Formula of DFL is as follows:
DFL = % change in EPS / % change in EBIT
Therefore, if EBIT is zero the FL is also equal to Zero.

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Similar questions

Financial leverage is a proportion of debt in an overall capital. State whether true or false.

Financial leverage is called favourable if

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(b) Rol is higher than the cost of debt

(d) If the degree of existing financial leverage is low

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(a) Return on investment is lower than the cost of debt

(b) ROI is higher than the cost of debt

(d) If the degree of existing financial leverage is low

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