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Chapter 2: 11BP_b (page 147)

The Harding Company manufactures skates. The company’s income statement for 20X1 is as follows:

HARDING COMPANY

Income Statement

For the year ended December 31, 20X1

Sales (10,500 skates at \(60 each)

\)630,000

Less: variable costs (10,500 tires at \(25)

262,500

Less: fixed cost

200,000

Earnings before interest and taxes (EBIT)

\)167,500

Interest expenses

62,500

Earning before taxes (EBT)

\(105,000

Income tax expenses (30%)

31,500

Earning after taxe (EAT)

\)73,500

Given this income statement, compute the following:

b. Degree of financial leverage.

Short Answer

Expert verified

The degree of financial leverage is 1.60.

Step by step solution

01

Earnings before interest and taxes

Earning before interest and taxes mean the income of the company before paying the finance cost and the income tax liability of the company.

02

Degree of financial leverage leverage

Degreeoffinancialleverage=EBITEBIT-Interest=$167,500$167,500-$62,500=1.60

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Most popular questions from this chapter

Database Systems is considering expansion into a new product line. Assets to support expansion will cost \(380,000. It is estimated that Database can generate\)1,410,000 in annual sales, with an 8 percent profit margin. What would net income and return on assets (investment) be for the year?

Using the Du Pont method, evaluate the effects of the following relationships forthe Butters Corporation:

c. What would happen to return on equity if the debt-to-total-assets ratio

decreased to 35 percent?

The Holtzman Corporation has assets of \(400,000, current liabilities of \)50,000, and long-term liabilities of \(100,000. There is \)40,000 in preferred stock outstanding; 20,000 shares of common stock have been issued.

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Holtzman’s stock has a P/E of 18 times earnings per share, what is the current

price of the stock?

c. What is the ratio of market value per share to book value per share?

Prepare an income statement for Franklin Kite Co. Take your calculations all the way to computing earnings per share.

Sales

$900,000

Shares outstanding

50,000

Cost of goods sold

400,000

Interest expenses

40,000

Selling and administration expenses

60,000

Depreciation expenses

20,000

Preferred stock dividend

80,000

Taxes

50,000

Perez Corporation has the following financial data for the years 20X1 and 20X2:

20X1

20X2

Sales

\(8,000,000

\)10,000,000

Cost of goods sold

6,000,000

9,000,000

Inventory

800,000

1,000,000

c. What conclusions can you draw from part a and part b?
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