Quick Launch Rocket Company, expects its sales to increase by 50 percent in the coming year as a result of NASA's recent problems with the space shuttle. The firm's current earnings per share (EPS) is $3.25. Its degree of operating leverage is 1.6, while its degree of financial leverage is 2.1. What is the firm's projected EPS for the coming year using the degree of total leverage (DTL) approach?
A) $3.25
B) $5.46
C) $10.92
D) $8.71
E) $19.63

Question

Quizplus · Accepted Answer

Degree of total leverage (DTL) = Degree of operating leverage (DOL) x Degree of financial leverage (DFL)
DTL = 1.6 x 2.1 = 3.36

Projected EPS = Current EPS x (1 + % increase in sales) x DTL
Projected EPS = $3.25 x (1 + 0.5) x 3.36
Projected EPS = $8.71

Therefore, the projected EPS for the coming year using the DTL approach is $8.71, which is option D.

Quick Launch Rocket Company, Expects Its Sales to Increase by 50