Question

In: Finance

Degree of financial leverage   Northwestern Savings and Loan has a current capital structure consisting of $250,000...

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)

$

Solutions

Expert Solution

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


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