Question

In: Finance

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.

Solutions

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


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