Compute the Degree of Financial Leverage for the company below: Wolfgang's Steak House Income Statement for Year Ended December 31, 2016 Sales (20,000 units @ $50 each) Less: Variable costs (20,000 units @ $20 each) Less Fixed Costs $1,000,000 400,000 200,000 $400,000 Earnings before interest & taxes( EBIT) Interest expense Earnings before taxes 75,000 $325,000
Compute the Degree of Financial Leverage for the company below: Wolfgang's Steak House Income Statement for Year Ended December 31, 2016 Sales (20,000 units @ $50 each) Less: Variable costs (20,000 units @ $20 each) Less Fixed Costs $1,000,000 400,000 200,000 $400,000 Earnings before interest & taxes( EBIT) Interest expense Earnings before taxes 75,000 $325,000
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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![**Compute the Degree of Financial Leverage for the company below:**
**Wolfgang's Steak House**
*Income Statement for Year Ended December 31, 2016*
- **Sales (20,000 units @ $50 each):** $1,000,000
- **Less: Variable costs (20,000 units @ $20 each):** $400,000
---
- **Less Fixed Costs:** $200,000
---
- **Earnings before interest & taxes (EBIT):** $400,000
- **Interest expense:** $75,000
---
- **Earnings before taxes:** $325,000
- **Income tax expense (30%):** $97,500
---
- **Earnings after taxes:** $227,500
---
**Multiple Choice Options:**
- **A.** 1.23
- **B.** 0.08
- **C.** 2.3
- **D.** 0.0
---
To calculate the Degree of Financial Leverage (DFL), you can use the formula:
\[ \text{DFL} = \frac{\text{EBIT}}{\text{EBIT} - \text{Interest expense}} \]
Substituting the given values:
\[ \text{DFL} = \frac{400,000}{400,000 - 75,000} = \frac{400,000}{325,000} = 1.23 \]
Thus, the correct answer is **A. 1.23**.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd440eb19-3b82-4f8f-832d-b1a3c65b4da3%2F15b53bf5-9562-4cf8-b9f5-74cc29e15788%2Ftacyiz_processed.png&w=3840&q=75)
Transcribed Image Text:**Compute the Degree of Financial Leverage for the company below:**
**Wolfgang's Steak House**
*Income Statement for Year Ended December 31, 2016*
- **Sales (20,000 units @ $50 each):** $1,000,000
- **Less: Variable costs (20,000 units @ $20 each):** $400,000
---
- **Less Fixed Costs:** $200,000
---
- **Earnings before interest & taxes (EBIT):** $400,000
- **Interest expense:** $75,000
---
- **Earnings before taxes:** $325,000
- **Income tax expense (30%):** $97,500
---
- **Earnings after taxes:** $227,500
---
**Multiple Choice Options:**
- **A.** 1.23
- **B.** 0.08
- **C.** 2.3
- **D.** 0.0
---
To calculate the Degree of Financial Leverage (DFL), you can use the formula:
\[ \text{DFL} = \frac{\text{EBIT}}{\text{EBIT} - \text{Interest expense}} \]
Substituting the given values:
\[ \text{DFL} = \frac{400,000}{400,000 - 75,000} = \frac{400,000}{325,000} = 1.23 \]
Thus, the correct answer is **A. 1.23**.
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