Ludicrous Bubble Semiconductor Degree of Total Leverage Calculation

Degree of Total Leverage Calculation

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Question

A fundamental analyst for Smith, Kleen, & Beetchnutty is examining the financial information of Ludicrous Bubble Semiconductor to determine whether it is an appropriate investment for a hedge fund. In his analysis, the fundamental analyst has identified the following financial information:

Sales $5,900,000 -

Total fixed cost $2,300,000 -

Total variable cost $1,665,000 -

Interest expense $75,750 -

EBIT $1,885,000 -

Amortization expense $47,550 -

Given this information, what is the Degree of Total Leverage for Ludicrous Bubble Semiconductor?

Answers

Explanations

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A. B. C. D. E.

D

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 $5,900,000 - variable costs $1,665,000] / [sales $5,900,000 - variable costs $1,665,000 - fixed costs $2,300,000 - interest expense $75,750]}

=2.278. "EBIT" and "amortization expense" are not explicitly incorporated into the DTL equation.

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