In: Finance
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) |
$ |
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