Expected EBIT Calculation

D

DOL = DTL/DFL = 7.5/1.875 = 4.0.

Change EBIT = (-0.20)(4.0)($2,000,000) = -$1,600,000.

EBIT = $2,000,000 - $1,600,000 = $400,000.

To determine the firm's expected EBIT (Earnings Before Interest and Taxes) in one year, we need to consider the degree of total leverage and the degree of financial leverage.

The degree of total leverage (DTL) is the ratio of the percentage change in EBIT to the percentage change in sales. In this case, the DTL is given as 7.5, which means that a 1% decrease in sales will result in a 7.5% decrease in EBIT.

The degree of financial leverage (DFL) is the ratio of the percentage change in earnings after taxes (EAT) to the percentage change in EBIT. In this case, the DFL is given as 1.875, which means that a 1% decrease in EBIT will result in a 1.875% decrease in EAT.

We are told that sales will decline by 20% next year. Using the DTL, we can calculate the expected change in EBIT as follows:

Expected change in EBIT = DTL * Percentage change in sales = 7.5 * (-20%) = -150%

So, the expected change in EBIT is -150%.

Now, we can calculate the expected EBIT in one year:

Expected EBIT = Current EBIT * (1 + Expected change in EBIT) = $2,000,000 * (1 + (-150%)) = $2,000,000 * (1 - 1.5) = $2,000,000 * (-0.5) = $1,000,000

Therefore, the firm's expected EBIT in one year is $1,000,000.

None of the provided answer choices matches the calculated value of $1,000,000. It seems that there may be an error in the options or the question itself.