Question

Degree of financial leverage   Northwestern Savings and Loan has a current capital structure consisting of

$250,000 of 17% ​(annual interest) debt and 2,000 shares of common stock. The firm pays taxes at the rate of 30%.

a. Using EBIT values of $82,000 and $124,000​, determine the associated earnings per share​ (EPS).

b. Using $82,000 of EBIT as a​ base, calculate the degree of financial leverage​ (DFL).

c. Rework parts a and b assuming that the firm has

$92,000 of 17% ​(annual interest) debt and 3,000 shares of common stock.

a. Calculate the EPS for EBIT value of $82,000 ​below: ​ (Round to the nearest dollar except for the EPS which should be rounded to the nearest​ cent.)

EBIT	$	82000
Less: Interest
Net profits before taxes	$
Less: Taxes (30%)
Net profit after taxes	$
EPS (2,000 shares)	$

Answer 1

a) Earning per share is calculated as-

	EBIT	$82,000.0
Less	Interest	$42,500	(250000*17%)
	EBT	$39,500.0
Less	Taxes (30%)	$11,850.00	(30% of EBT)
	Net income	$27,650.00
	Number of shares Outstanding	2000
	Earning per share	$13.83	(net income / Number of share)

Hence earning per share shall be $13.83/ share

Earning per share for EBIT of 124000 is given as

	EBIT	$124,000.0
Less	Interest	$42,500	(250000*17%)
	EBT	$81,500.0
Less	Taxes (30%)	$24,450.00	(30% of EBT)
	Net income	$57,050.00
	Number of shares Outstanding	2000
	Earning per share	$28.53	(net income / Number of share)

hence earning per share will be $28.53

b) Degree of financial leverage is given by = EBIT/ EBT= 82000/39500= 2.07595

c) Earning per share with the changed numbers are given as

	EBIT	$82,000.0
Less	Interest	$15,640	(92000*17%)
	EBT	$66,360.0
Less	Taxes (30%)	$19,908.00	(30% of EBT)
	Net income	$46,452.00
	Number of shares Outstanding	3000
	Earning per share	$15.48	(net income / Number of share)

Earning per share will be $15.48

and Degree of financial leverage will be EBIT/EBT= 82000/66360= 1.23568

for EBIT of 124000 EPS will be calculated as

	EBIT	$124,000.0
Less	Interest	$15,640	(92000*17%)
	EBT	$108,360.0
Less	Taxes (30%)	$32,508.00	(30% of EBT)
	Net income	$75,852.00
	Number of shares Outstanding	3000
	Earning per share	$25.28	(net income / Number of share)

Earning per share will be $25.28

Degree of Financial leverage is given by = EBIT/EBT= 124000/108360= 1.14433