Vapor Lock Motors’ EBIT is $7,000,000, the company’s interest expense is $2,000,000, and its tax rate is 40 percent. Vapor Lock’s beta is 1.5. a. What is Vapor Lock’s DFL? b. If Vapor Lock were able to grow its EBIT by 50%, what would be the percentage increase in net income? c. If Vapor Lock were able to grow its EBIT by 50%, what would be the resulting net income
Vapor Lock Motors’ EBIT is $7,000,000, the company’s interest expense is $2,000,000, and its tax rate is 40 percent. Vapor Lock’s beta is 1.5. a. What is Vapor Lock’s DFL? b. If Vapor Lock were able to grow its EBIT by 50%, what would be the percentage increase in net income? c. If Vapor Lock were able to grow its EBIT by 50%, what would be the resulting net income
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Vapor Lock Motors’ EBIT is $7,000,000, the company’s interest expense is $2,000,000,
and its tax rate is 40 percent. Vapor Lock’s beta is 1.5.
a. What is Vapor Lock’s DFL?
b. If Vapor Lock were able to grow its EBIT by 50%, what would be the percentage
increase in net income?
c. If Vapor Lock were able to grow its EBIT by 50%, what would be the resulting
net income?
Expert Solution
Step 1: INTRODUCTION
DFL means how much the earnings of a firm change due to change in the debt-equity ratio of the firm. Change in debt-equity ratio means change in capital structure of the firm. It also leads to change in interest component which a firm which a firm is required to pay.
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