Answer = Muddy’s degree of operating leverage (DOL) =1.5x

Working notes for the above answer is as follow

Degree Of Operating Leverage – DOL

It istype of leverage ratio summarizing the effect a particular amount of Opearating leverage has on a company’s earnings before interest and taxes (EBIT).

DOL = % change in EBIT / % change in sales

We have been provided that Muddy Murphy’s degree of financial leverage (DFL) is 4×. The company knows that if sales are 6 percent higher than forecasted, its EPS will in- crease by 36 percent

So first of all we will calculate DFL as follow

DFL = % change in EPS /

4x = 36% /% change in EBIT

% change in EBIT = 36%/4

% change in EBIT = 9%

Now we will calculate DOL as follow

DOL = % change in EBIT / % change in sales

=9% /6%

DOL = 1.5X