Question

Degree of financial leverage Northwestern Savings and Loan has a current capital structure consisting of $300,000 of 17% (annual interest) debt and 2,000 shares of common stock. The firm pays taxes at the rate of 30%. a. Using EBIT values of $84,000 and $120,000, determine the associated earnings per share (EPS). b. Using $84,000 of EBIT as a base, calculate the degree of financial leverage (DFL). c. Rework parts a and b assuming that the firm has $97,000 of 17% (annual interest) debt and 3,000 shares of common stock.

Answer 1

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- 2x Insert Delete Format Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Cells HBHCHD HE HF 5 ACCOUNTS latest - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri -11AA = = = Dr Wrap Text General Ea Copy Paste B I U D E A E = 5 st Fat Merge Merge & Center Center Format Painter $ - % $ % , .0 .00 8. Conditional Format Cell Formatting as Table Styles Clipboard Font Alignment Number Styles HB157 fix GSGT GU GVGW GX GYGZ HA 156 CAPITAL STRUCTURE 157 DEBT 300000 @ 17% 158 EQUITY 2000 SHARES 159 160 EBIT 84000 120000 161 INTEREST 51000 51000 [300000 X 17%] 162 EBT 33000 69000 163 TAXES 9900 20700 164 NET INCOME 23100 48300 165 166 NO OF SHARES 2000 2000 167 168 EPS = 11.55 24.15 169 170 % CHANGE IN EPS = 109.09% [(24.15-11.55)/11.55] % CHANGE IN EBIT = 42.86% [(120000-84000)/84000] 172 173 DFL = % CHANGE IN EPS/ % CHANGE IN EBIT 174 DFL = 109.09% /42.86% 175 DFL = 2.55 176 H FIFO CASH BUDGET budget 45 days cycle ROE, BV MV ratio VARIANCE BEP, OL FL ratios DETROIT float B-S profit loss Rea ferences 171 SALES BUDGET dupont DIFF ANALYSIS ovel BOU 120% _ ...B 199 * 10 ENG 30-11-2019

ACCOUNTS latest - Microsoft Excel (Product Activation Failed) View Add-Ins File Home Insert Page Layout Formulas Data Review - 2x % Cut General 4:0 .00 8. Insert Delete Format $ - % % Number Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Cells -11AA = = = Dr Wrap Text U D A E SF Merge Merge & Center Center Font Alignment fax GU GVGW GX CAPITAL STRUCTURE DEBT 97000 @ 17% EQUITY 3000 SHARES GYGZ HA HBHCHD HE HF 5 Calibri E Copy Paste Format Painter B I Clipboard HB178 - GS GT 178 179 180 181 182 183 184 185 186 187 188 189 190 191 192 193 194 195 196 EBIT INTEREST EBT TAXES NET INCOME 84000 16490 67510 20253 47257 120000 16490 [97000 X 17%] 103510 31053 72457 NO OF SHARES 3000 3000 EPS = 15.75 24.15 % CHANGE IN EPS = % CHANGE IN EBIT = 53.33% [(24.15-15.75)/15.75] 42.86% [(120000-84000)/84000] DFL = DFL = DFL = % CHANGE IN EPS/ % CHANGE IN EBIT 53.33%/42.86% 197 1.24 198 FIFO budget 45 days cycle ROE, BV MV ratio VARIANCE BEP, OL FL ratios DETROIT float B-S profit loss SALES BUDGET dupont CASH BUDGET ferences DIFF ANALYSIS ovel BOU 120% Real _ ...B 199 * 10 ENG 30-11-2019