Question

4. Financial leverage The following is a list of selected information for Arsenal Co. for the fiscal year Unit Change 60 Sales in units (millions) Earnings before interest and taxes (EBIT) Less: Interest Forecasted Operations 150 2,625.00 (175.00) Sales with 40.00% Increase 210 4,042.50 (175.00) 1,417.50 (0.00) Earnings before taxes Less: Taxes (40%) Net income $2,450.00 980.00 1,470.00 $3,867.50 1,547.00 $1,417.50 (0.00) 2,320.50 850.50 Earnings per share (30 million shares) $49.00 $77.35 $28.35

Answer 1

Degree of financial leverage= % change in EPS/ % change in EBIT

Answee Degree of financial leverage z % change in Els % Change in EBIT % change in EPS2 $77.35 – $49.00 x 160 z 57.85%. $49.00 ole change in EBIT = $4042.50 - $2625.00 $2625.00 8100 - 54% 1.07 2 57,85º6 54013 So Answer is 1.07% Scanned with CamScanner

In second case, comparison is being done with Hotspurs company where its mentioned that all else being equal, whether arsenal co. is more,less or equally risky. So, in my opinion its equally risky in case all else being equal as the degree of financial leverage is same in both the cases i.e. 1.07X.