The company incurs costs of $23.79 million regardless of the output level. It sells 6.94 million...

The company incurs costs of $23.79 million regardless of the output level. It sells 6.94 million units of its product at the price of $9.97, and its variable costs per unit are $2.2. The company has $50 million of debt with an annual interest rate of 5.39%. What is the degree of financial leverage at the current level of sales? Round to two decimals.

Expert Solution

The degree of financial leverage at the current level of sales

Income Statement
Particulars	(Amount ($ in Million)

Sales [6.94 Million x $9.97]	69.1918
Less: Variable Costs [6.94 Million x $2.20]	15.2680
Contribution Margin	53.9238
Less: Fixedc Costs	23.7900
EBIT	30.1338
Less: Interest Expenses [$50 Million x 5.39%]	2.6950
EBT	27.4388

The degree of financial leverage = EBIT / EBT

= $30.1338 Million / $27.4388 Million

= 1.10 Times

Therefore, the degree of financial leverage at the current level of sales is 1.10

jeff jeffy answered 2 years ago

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