Gentech, Inc. is an integrated circuit (microchip)manufacturer based out of New Jersey. Its principal products include microprocessors and motherboard chipsets. Selected financial statement values for Gentech are shown in the table, below. What is the degree of total leverage for Gentech given the change in revenues from Year 1 to Year 2? $$\begin{array} { | c | c | c | }
\hline \begin{array} { c }
\text { Gentech Inc. } \
( \$ 000 \text { s } )
\end{array} & & \
\hline & \text { Year 1 } & \text { Year 2 } \
\hline \text { Sales } & \$ 70,000 & \$ 75,000 \
\hline \text { EBIT } & 9,000 & 9,800 \
\hline \text { EPS } & 0.4172 & 0.4586 \
\hline
\end{array}$$
A)1.39
B)1.24
C)1.11
D)0.54
E)0.96

Question

Gentech, Inc. is an integrated circuit (microchip)manufacturer based out of New Jersey. Its principal products include microprocessors and motherboard chipsets. Selected financial statement values for Gentech are shown in the table, below. What is the degree of total leverage for Gentech given the change in revenues from Year 1 to Year 2? $$\begin{array} { | c | c | c | } 
\hline \begin{array} { c } 
\text { Gentech Inc. } \
( \$ 000 \text { s } )
\end{array} & & \
\hline & \text { Year 1 } & \text { Year 2 } \
\hline \text { Sales } & \$ 70,000 & \$ 75,000 \
\hline \text { EBIT } & 9,000 & 9,800 \
\hline \text { EPS } & 0.4172 & 0.4586 \
\hline
\end{array}$$
A)1.39
B)1.24
C)1.11
D)0.54
E)0.96

Quizplus · Accepted Answer

The degree of total leverage (DTL) is calculated as the percentage change in EPS divided by the percentage change in sales. The percentage change in EPS is ((0.4586 - 0.4172) / 0.4172) = 0.099 or 9.9%. The percentage change in sales is ((75,000 - 70,000) / 70,000) = 0.0714 or 7.14%. Therefore, DTL = 9.9% / 7.14% = 1.39.

Gentech, Inc A)139 B)1

Gentech, Inc A)139
B)1