Question

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Answer 1

	Existing	Scheme a	Scheme b	Scheme c	Scheme d
EBIT	$600,000	$600,000	$600,000	$600,000	$600,000
Interest Expense	0	0	100,000	300,000	150,000
EBT	600,000	600,000	500,000	300,000	450,000
Tax ( 12 % )	72,000	72,000	60,000	36,000	54,000
EAT	528,000	528,000	440,000	264,000	396,000
Pref. Dividends	0	0	90,000	0	135,000
Earnings available for common stockholders	528,000	528,000	350,000	264,000	261,000
Common Shares Outstanding	40,000	100,000	60,000	40,000	40,000
Earnings per Share ( EPS)	$ 13.20	$ 5.28	$ 5.83	$ 6.60	$ 6.53
Degree of Financial Leverage	1: 1	1: 1	1.2 : 1	2 : 1	1.33 : 1

Degree of financial leverage = EBIT / ( EBIT - Interest )

Financial leverage is lowest in Scheme a, and highest in Scheme c.