Question

Degree of financial leverage   Northwestern Savings and Loan has a current capital structure consisting of $ 220 comma 000 of  14 % ​(annual interest) debt and 3 comma 000 shares of common stock. The firm pays taxes at the rate of 40 %. a. Using EBIT values of $ 79 comma 000 and $ 117 comma 000​, determine the associated earnings per share​ (EPS). b. Using $ 79 comma 000 of EBIT as a​ base, calculate the degree of financial leverage​ (DFL). c. Rework parts a and b assuming that the firm has $ 98 comma 000 of 14 % ​(annual interest) debt and 4 comma 000 shares of common stock.

a. Calculate the EPS for EBIT value of $ 79 comma 000 ​below: ​ (Round to the nearest dollar except for the EPS which should be rounded to the nearest​ cent.) EBIT $ Less: Interest Net profits before taxes $ Less: Taxes (40%) Net profit after taxes $ EPS (3,000 shares) $

Answer 1

	a&b	c
EBIT	79,000	79,000
Less: Interest	30,800	13,720
EBT	48,200	65,280
Less: Taxes	19,280	26,112
Net Income	28,920	39,168
Number of shares	3,000	4,000
EPS	9.64	9.792
DFL = EBIT/EBT	1.639004149	1.210171569