Determine the Degree of Financial leverage (DFL) of each alternatives assuming an Earnings before interest and tax (EBIT) of $120,000.
A firm needed $500,000 total resources to operate a project that would yield them a profit. It has drafted two (2) alternatives in order to procure this amount. First alternative - invest $40,000 among the five owners for a total equity of $200,000, and loan from a bank the remaining $300,000 with a 10% interest annually of $30,000. Second alternative - invest $40,000 among the five owners and invite five more investors to contribute $40,000 each for a total capital of $400,000, and loan the remaining $100,000 from the bank and pay 10% or $10,000 annual interest. Determine the Degree of Financial leverage (DFL) of each alternatives assuming an Earnings before interest and tax (EBIT) of $120,000.
A.First alternative - 1.33; Second alternative - 1.09
B.First alternative - 1.25; Second alternative - 1.07
C.First alternative - 1.20; Second alternative - 1.05
D.First alternative - 1.14; Second alternative - 1.04
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