Risk Management Process Overview
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Questions and Answers

What is the formula for calculating the Degree of Financial Leverage (DFL)?

  • DFL = (% Change in EBIT) / (% Change in Net Income)
  • DFL = (% Change in Net Income) / (% Change in Revenue)
  • DFL = (% Change in Net Income) / (% Change in EBIT) (correct)
  • DFL = (% Change in EBIT) / (% Change in Revenue)

    • What is the net income of the business in the given example?

  • $54,400
  • $32,500 (correct)
  • $29,900
  • $56,000

    • What is the percent change in net income for the business in the given example?

  • 8.7% (correct)
  • 56%
  • 32.5%
  • 2.95%

    • What is the formula for calculating Earnings Before Interest and Taxes (EBIT)?

    <p>EBIT = Net Income + Interest + Taxes</p> Signup and view all the answers

    What is the EBIT for the business in the given example?

    <p>$56,000</p> Signup and view all the answers

    What is the percent change in EBIT for the business in the given example?

    <p>2.95%</p> Signup and view all the answers

    What does a higher value of the Degree of Financial Leverage (DFL) indicate?

    <p>The business has a higher level of fixed costs</p> Signup and view all the answers

    What is the significance of the Degree of Financial Leverage (DFL) for a business?

    <p>It helps in evaluating the risk associated with the business's capital structure</p> Signup and view all the answers

    What is the purpose of calculating the Degree of Financial Leverage (DFL)?

    <p>To measure the sensitivity of a company's net income to changes in its EBIT</p> Signup and view all the answers

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