Ace Consulting, a corporate finance consulting firm, is examining the operating performance and asset structure of Clay Industries. In their analysis, Ace has identified the following information for the most recent reporting period:
EBIT $500,590 -
Sales $988,000 -
Interest paid $40,800 -
Given this information, what is the Degree of Financial Leverage for Clay Industries?
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A. B. C. D. E. F.Explanation
To calculate the DFL, the financial analyst needs to determine the EBIT and interest paid for a predetermined time period. To calculate the Degree of Financial
Leverage, the following equation is used: {EBIT/[EBIT - interest paid]}. Incorporating the given information into this equation yields the following: {$500,590/
[$500,590 - $40,800]}= 1.089. The annual sales figure is not necessary in the calculation of DFL. Additionally, remember that the DFL figure is always greater than one, therefore the first and fourth answers can be eliminated as possibilities by observation alone.