Illinois Tool Company's (ITC) fixed operating costs are $1,260,000 and its variable cost ratio (i.e., variable costs as a fraction of sales) is 0.70.The firm has $3,000,000 in bonds outstanding at an interest rate of 8 percent.ITC has 30,000 shares of $5 preferred stock and 150,000 shares of common stock outstanding.ITC is in the 50 percent corporate income tax bracket.Forecasted sales for next year are $9 million.What is ITC's degree of financial leverage at an EBIT level of $1,440,000?
A)1.20
B)3.0
C)1.60
D)1.875

Question

Quizplus · Accepted Answer

DFL = $1,440,000/[$1,440,000 - 0.08($3,000,000) - $150,000/(1 - 0.5)]
= 1.60

Illinois Tool Company's (ITC) Fixed Operating Costs Are $1,260,000 and Its