Assume that a firm currently has EBIT of $2,000,000,a degree of total leverage of 7.5,and a degree of financial leverage of 1.875.If sales decline by 20% next year,then what will be the firm's expected EBIT in one year?
A)$361,000
B)$380,000
C)$400,000
D)$420,000
E)$441,000

Question

Quizplus · Accepted Answer

Degree of total leverage (DTL) = Degree of operating leverage x Degree of financial leverage
Given, DTL = 7.5 and DFL = 1.875
Therefore, DOL = 7.5/1.875 = 4
Now, using the following formula to calculate the new EBIT:
New EBIT = EBIT × (1 - % change in sales) × DOL
New EBIT = 2,000,000 × (1 - 0.20) × 4
New EBIT = $400,000

Assume That a Firm Currently Has EBIT of $2,000,000,a Degree