Quick Launch Rocket Company: Projected EPS Calculation | CFA Level 1 Exam Answer

Projected EPS Calculation for Quick Launch Rocket Company using the DTL approach.

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Question

Quick Launch Rocket Company, a satellite launching firm, expects its sales to increase by 50 percent in the coming year as a result of NASA's recent problems with the space shuttle. The firm's current EPS is $3.25. Its degree of operating leverage is 1.6, while its degree of financial leverage is 2.1. What is the firm's projected EPS for the coming year using the DTL approach?

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A. B. C. D. E.

E

EPS(1) = EPS(0) + EPS(0) [DTL x (percent change in sales)]

= $3.25 [1 + (1.6)(2.1)(0.5)] = $3.25 [2.68]

EPS(1) = $8.71.

To calculate the projected EPS (Earnings per Share) for the coming year using the Degree of Total Leverage (DTL) approach, we need to follow these steps:

Step 1: Calculate the Degree of Total Leverage (DTL) The Degree of Total Leverage (DTL) is the product of the Degree of Operating Leverage (DOL) and the Degree of Financial Leverage (DFL).

Given: Degree of Operating Leverage (DOL) = 1.6 Degree of Financial Leverage (DFL) = 2.1

DTL = DOL × DFL DTL = 1.6 × 2.1 DTL = 3.36

Step 2: Calculate the percentage increase in sales The question states that Quick Launch Rocket Company expects its sales to increase by 50 percent in the coming year.

Percentage increase in sales = 50%

Step 3: Calculate the percentage increase in EPS Using the DTL approach, the percentage increase in EPS is calculated as the product of the percentage increase in sales and the DTL.

Percentage increase in EPS = Percentage increase in sales × DTL Percentage increase in EPS = 50% × 3.36 Percentage increase in EPS = 168%

Step 4: Calculate the projected EPS The projected EPS is calculated by adding the percentage increase in EPS to the current EPS.

Projected EPS = Current EPS + (Current EPS × Percentage increase in EPS) Projected EPS = $3.25 + ($3.25 × 168%) Projected EPS = $3.25 + ($3.25 × 1.68) Projected EPS = $3.25 + $5.46 Projected EPS = $8.71

Therefore, the projected EPS for the coming year using the DTL approach is $8.71.

The correct answer is E. $8.71.

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