Question

Degree of financial leverage Northwestern Savings and Loan has a current capital structure consisting of $250,000 of 17% (annual interest) debt and 3,000 shares of common stock. The firm pays taxes at the rate of 22%. a. Using EBIT values of $80,000 and $120,000, determine the associated earnings per share (EPS) b. Using $80,000 of EBIT as a base, calculate the degree of financial leverage (DFL) c. Rework parts a and b assuming that the firm has $105,000 of 17% (annual interest) debt and 4,000 shares of common stock. a. Calculate the EPS for EBIT value of $80,000 below: (Round to the nearest dollar except for the EPS which should be rounded to the nearest cent.) EBIT $ Less: Interest Net profits before taxes Less: Taxes (22%) Net profit after taxes $ EPS (3,000 shares)

Answer 1

EPS for EBIT Value of $80,000 and $120,000
Particulars	Amout($)	Amout($)
EBIT	80,000	1,20,000
Less: Interest Expense [250,000 x 17%]	42,500	42,500
Net Profit Before Tax	37,500	77,500
Less: Tax at 22%	8,250	17,050
Net Profit After Tax	29,250	60,450
Number of shares	3,000 Shares	3,000 Shares
EPS [Net Profit After Tax / Number of shares]	$9.75 per share	$20.15 per share