Self-Assessment HW7B ((Financial leverage)

Question 4 Use the following information about Rat Race Home Security, Inc. to answer the questions: Average selling price per unit $343. Variable cost per unit $182 Units sold 325 Fixed costs $7.466 Interest expense $15,252 Based on the data above, what will be the resulting percentage change in earnings per share of Rat Race Home Security, Inc. if they expect operating profit to change 6.5 percent? (You should calculate the degree of financial leverage first). (Write the percentage sign in the "units" box). Round the answer to two decimals in percentage form. Your Answer: 9.88 Answer W Hide Check my answer Step 1: Calculate the degree of financial leverage: DFL = EBIT/(EBIT -1) = [Q*(P-V)-F)/ [Q*(P-V) - F-I] Where Q= the number of units sold P = unit sales price F = total fixed costs anticipated over the planning period V = the unit variable cost I Interest expense DFL = EBIT/(EBIT -1) = [Q*(P-V)-F/ [Q*(P-V) - F—I] = [325*(S343 ~§182)-$7,466]/ [325*(S343 ~§182)-57,466 -$15,252 ] = 44859 /29607 = 1.52 Step 2: Calculate the resulting percentage change in earnings per share of Rat Race Home Security, Inc. if they expect operating profit to change 6.5 percent. 1.52%6.5% = 9.88%