Question

6) In 2019, ROG’s DTL is 2.5, and ROG’s sales in 2020 are expected to increase by 10%. Its EPS in 2020 (EPS1) will be ( ) if its EPS in 2019 (EPS0) was $2.20.

Answer 1

HI,

Degree of total leverage is the sensitivity between change in net income and change in number of units sold.

here DTL = 2.5

Expected change in Sales = 10% (that means if price remain same then change in number of units sold is 10%)

EPS in 2019 =$2.2

EPS in 2020 EPS01=?

expected change in EPS = (EPS1-2.2)/2.2

so DTL = % change in EPS/ % change in Sales

2.5 = (EPS1-2.2)/2.2/0.1

2.5*0.1*2.2 = EPS1-2.2

0.55 = EPS1-2.2

EPS01 = 2.2+0.55 = $2.75

Hence EPS in 2020 is $2.75