Assume that a firm has a degree of financial leverage (DFL) of 1.25. If sales increase by 20 percent, the firm will experience a 60 percent increase in earnings per share (EPS) and it will have an earnings before interest and taxes (EBIT) of $100,000. What will be the EBIT for the firm if sales do not increase?
A) $67,568
B) $100,000
C) $113,412
D) $84,375
E) $42,115

Question

Quizplus · Accepted Answer

DFL = EBIT / (EBIT - Interest)1.25 = 100,000 / (100,000 - Interest)Interest = 25,000EBIT without sales increase = 100,000 - 25,000 = $75,000

Assume That a Firm Has a Degree of Financial Leverage