Question

1.Amber Angler's fixed operating costs are $2m and its variable cost ratio 70%. The firm has $2.1m in bonds outstanding at an interest rate of 4%. Amber has 0.05m shares of preferred stock which pays a $4 dividend. Crow is in the 40% corporate income tax bracket. Forecasted sales for next year are $9m. What is Amber's degree of financial leverage?

Round to two decimal places.

b.A firm with a DFL of 1.9 expects EBIT to increase by 3.90%. If our last EPS was $1.76, what will our new EPS be?

c.If a firm has a DOL of 1.90 and a DFL of 1.87, what is its DCL?

d.If a firm has a DCL of 2.26 and expects sales to increase by 5%, how much will EPS increase by?

Answer 1

Ques-1)

Particular	Amount in $
Sales	9,000,000.00
Less: Variable Cost[@70% of Sales]	(6,300,000.00)
Less: Fixed Costs	(2,000,000.00)
EBIT	700,000.00
Interest Expenses [2,100,000*4%]	(84,000.00)
Earning before tax (EBT)	616,000.00
Taxes @40%	(246,400.00)
Net Income	369,600.00

Degree of Financial Leverage (DFL) = EBIT/EBT

=$700,000/$616,000

= 1.14 times

Ques-b) DFL = 1.9 times

DFL = % change in EPS/% Change in EBIT

1.9 = % change in EPS/3.90%

% change in EPS = 7.41%

EPS last year = $1.76

New EPS = EPS last year(1+% change in EPS)

=$1.76( 1 + 0.0741)

= $1.89

Ques-c)

DOL = 1.90

DFL = 1.87

DCL = DOL*DFL

= 1.90*1.87

= 3.553 times

Ques-d)

DCL = 2.26

DCL = % change in EPS/% Change in Sales

2.26 = % change in EPS/5%

% change in EPS = 11.30%

So, EPS will increase by 11.30%

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