Bowden Building Supply reported an EBIT of $5,531,500, has a 35% tax rate, pays interest of $480,000 on $9,290,000 of debt and $0.60 to each of its 500,000 common shares outstanding. What is the company experiencing?

Question

Quizplus · Accepted Answer

The formula for calculating the degree of financial leverage (DFL) is EBIT / (EBIT - Interest). Plugging in the given values, we get DFL = 5,531,500 / (5,531,500 - 480,000) = 1.1. A DFL greater than 1 indicates the presence of financial leverage, meaning the company is using debt to finance its operations.

Bowden Building Supply Reported an EBIT of $5,531,500, Has a 35