Question

What would be the degree of financial leverage for Under A Cloud Skydiving School if the company will have earnings before interest and taxes of $750,000 which would be a 15% increase? The firm had EPS of $1.25 but, with the increased earnings, anticipates paying $1.37 .

Answer 1

Answer:

Degree of Financial Leverage = 0.64

Explanation:

Degree of Financial leverage refers to the proportion of debt in the capital structure of a company. It also signifies earnings for shareholders i.e per share earnings of shareholders (EPS) with respect to operating income earned by a company.

In the given case, eps before = $1.25

                            eps afterwards = $1.37

Degree of financial leverage is expressed as:

$DFL =\ \frac{Percentage\ change\ in\ EPS}{Percentage\ change\ in\ EBIT}$

Wherein,

EPS = Earnings per share

EBIT = Earnings before interest and taxes

Percentage change in EPS = $\frac{1.37\ -\ 1.25}{1.25}$ = 9.6%

Percentage change in EBIT = 15%

Hence Degree of Financial Leverage = $\frac{9.6}{15}$ = 0.64