It is December 31. Last year, Campbell Construction had sales of $80,000,000, and it forecasts that next year’s sales will be $76,000,000. Its fixed costs have been—and are expected to continue to be—$40,000,000, and its variable cost ratio is 21.00%. Campbell’s capital structure consists of a $15 million bank loan, on which it pays an interest rate of 8%, and 750,000 shares of common equity. The company’s profits are taxed at a marginal rate of 40%. The following are the two principal equations that can be used to calculate a firm’s DFL value: DFL (at EBIT = $X)=Percentage Change in EPSPercentage Change in EBITDFL (at EBIT = $X)=Percentage Change in EPSPercentage Change in EBIT DFL (at EBIT = $X)=EBITEBIT−Interest−Preferred Dividends(1 – Tax Rate)DFL (at EBIT = $X)=EBITEBIT−Interest−Preferred Dividends(1 – Tax Rate) Given this infromation, complete the following sentences: • The company’s percentage change in EBIT is ______(-12.26%/ -16.34%/ -13.62%) . • The percentage change in Campbell’s earnings per share (EPS) is _______ ( -11.50%/ -14.38%/ -20.13%) . • The degree of financial leverage (DFL) at $76,000,000 is _______ (1.06/ 0.95/ 2.88) . (Hint: Use the changes in EPS and EBIT that you computed to determine DFL.)
It is December 31. Last year, Campbell Construction had sales of $80,000,000, and it
The following are the two principal equations that can be used to calculate a firm’s DFL value:
DFL (at EBIT = $X)=Percentage Change in EPSPercentage Change in EBITDFL (at EBIT = $X)=Percentage Change in EPSPercentage Change in EBIT
DFL (at EBIT = $X)=EBITEBIT−Interest−Preferred Dividends(1 – Tax Rate)DFL (at EBIT = $X)=EBITEBIT−Interest−Preferred Dividends(1 – Tax Rate)
Given this infromation, complete the following sentences:
| • | The company’s percentage change in EBIT is ______(-12.26%/ -16.34%/ -13.62%) . |
| • | The percentage change in Campbell’s earnings per share (EPS) is _______ ( -11.50%/ -14.38%/ -20.13%) . |
| • | The degree of financial leverage (DFL) at $76,000,000 is _______ (1.06/ 0.95/ 2.88) . (Hint: Use the changes in EPS and EBIT that you computed to determine DFL.) |
Consider the following statement about DFL, and indicate whether or not it is correct.
Assume that at a given level of sales, the firm’s DFL is 4.50. This means that a 1% decrease in the firm’s EBIT will result in a corresponding 4.5% increase in the firm’s EBIT.
True
False
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