A firm has EBIT of $375,000, interest expense of $75,000, preferred dividends of $6,000 and a tax rate of 40 percent. The firm's degree of financial leverage at a base EBIT level of $375,000 is ________.
A) 0.97
B) 1.29
C) 1.27
D) 1.09

Question

Quizplus · Accepted Answer

Degree of Financial Leverage (DFL) = % Change in Earnings per share / % Change in EBIT

% Change in Earnings per share = % Change in EBIT * DFL

DFL = (EBIT - I - Prefs) / (EBIT - I - Prefs - (1 - T) * EBT)

DFL = (375000 - 75000 - 6000) / (375000 - 75000 - 6000 - (1 - 0.4) * (375000 - 75000))

DFL = 1.29

A Firm Has EBIT of $375,000, Interest Expense of $75,000