The management of Intelligent Semiconductor is examining the asset structure of its superconductor division, and has ascertained the following annual financial information: Invoiced sales $6,850.000
EBITA $3,525,000 -
Interest expense $150,000 -
Amortization expense $245,000 -
Given this information, which of the following best characterizes the Degree of Financial Leverage for this division?
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A. B. C. D. E.A
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]}. In this example, EBITA is provided rather than EBIT. Thankfully, however, a figure is given for amortization expense. To determine the EBIT, subtract the amortization expense from then EBITA figure, which gives a figure of $3,280,000 for the EBIT. The next step is to incorporate the given information into the DFL equation as follows: {EBIT $3,280,000 / [EBIT $3,280,000 - interest expense $150,000]}=1.048 The
Degree of Financial Leverage measures the percentage change in EPS which results from a given percentage change in EBIT. Remember that any preferred stock dividends must be incorporated into the DFL calculation, and that the DFL can never be less than one.