Question

Question 8 A firm with a DFL of 2.3 expects EBIT to increase by 5.74%. If our last EPS was $3.57, what will our new EPS be?

Answer 1

8.

DFL(Degree of Financial leverage) = 2.3

EBIT increase by 5.74%

Last EPS = $3.57

$DFL = \frac{\textup{\% change in EPS}}{\textup{\% change in EBIT}}$

$\textup{\% change in EPS} = \textup{\% change in EBIT}*DFL$

$\textup{\% change in EPS} = 0.0574*2.3$

$\large \textup{\% change in EPS} = 0.132020$

Thus, New EPS would be:

$\textup{New EPS} = 3.57*(1+\textup{\% change in EPS})$

$\large \textup{New EPS} = \$4.04$

9.

DCL (Degree of combined leverage) = 2.73

% change in sales = 6%

$DCL = \frac{\textup{\% change in EPS}}{\textup{\% change in Sales}}$

$\textup{\% change in EPS} = \textup{\% change in Sales}*DCL$

Thus, EPS increase by:

$\textup{\% change in EPS} = 0.06*2.73$

$\large \textup{\% change in EPS} = 16.38\%$

Hope it will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.