P13-12 Degree of financial leverage Northwestern Savings and Loan has a current

Question

P13-12 Degree of financial leverage Northwestern Savings and Loan has a current capital structure Consisting of $250,000 of 16% (annual interest) debt and 2,000 shares of common stock. The firm pays taxes at the rate of 40%. a. Using EBIT values of $80,000 and $120,000, determine the associated earnings per share (EPS). b. Using $80,000 of EBIT as a base, calculate the degree of financial leverage (DFL). c. Rework parts a and b assuming that the firm has $100,000 of 16% (annual interest) debt and 3,000 shares of common stock.

Explanation / Answer

a)

b)Degree of financial leverage (if 80000 is used as a base)   =EBIT /(EBIT - Interest)

                                                                                       =80000/(80000-40000)

                                                                                       = 80000/ 40000

                                                                                      = 2

c)

Degree of financial leverage (if EBIT =80000)        =EBIT/(EBIT-Interest)

                                                                      =80000/(80000-16000)

                                                                          = 80000/64000

                                                                   = 1.25

IF EBIT = 80000 120000 less :Interest [250000*16%] (40000) (40000) EBT 40000 80000 less :Tax 40% of EBT (16000) (32000) EAT (a) 24000 48000 Number of shares   (b) 2000 2000 EPS = EAT/ Number of shares 12 24

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.