Intelligent Semiconductor: Degree of Total Leverage Calculation

Degree of Total Leverage

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Question

Ace Consulting, a corporate finance consulting firm, is examining the operations of Intelligent Semiconductor and has determined the following information:

Sales $1,000,000 -

Total variable costs $270,000 -

Total fixed costs $400,000 -

Interest expense $75,000 -

EBIT $325,000 -

Given this information, what is the degree of total leverage for Intelligent Semiconductor?

Answers

Explanations

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A. B. C. D. E.

Explanation

The Degree of Total Leverage (DTL) demonstrates how a given change in sales will impact a firm's EPS. The equation used for calculating the DTL is as follows:

{[Sales - variable costs] / [sales - variable costs - fixed costs - interest expense]}. Incorporating the given values for these components into the DTL equation yields the following: {[Sales $1,000,000 - variable costs $270,000] / [sales $1,000,000 - variable costs $270,000 - fixed costs $400,000 - interest expense $75,000]}

=2.863. The EBIT figure is not explicitly incorporated into the DTL equation.

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