The degree of financial leverage (DFL) is defined as the percentage change in earnings per share

(EPS) resulting from a 1 percent change in EBIT.

a. The degree of financial leverage approaches a maximum as the firm comes closer to operating at its loss level, the level where EPS is $0.

b. All other things being equal, the higher a firm’s DFL, the greater is its financial risk.

c. Financial risk, the additional variability of a firm’s EPS that results from the use of financial leverage, can also be measured by various financial ratios, such as the debt-to-total-assets ratio and the times-interest-earned ratio. P-9687