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Homework answers / question archive / Use the following information about Rat Race Home Security, Inc
Use the following information about Rat Race Home Security, Inc. to answer the questions:
Average selling price per unit $311.
Variable cost per unit $190
Units sold 393
Fixed costs $7,134
Interest expense 16,630
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 3.4 percent?
(You should calculate the degree of financial leverage first).
Computation of the percentage change in earnings per share (EPS):-
EBIT = Sales - Variable costs - Fixed costs
= ($311 * 393) - ($190 * 393) - $7,134
= $122,223 - $74,670 - $7,134
= $40,419
EBT (Earnings before tax) = EBIT - Interest expense
= $40,419 - $16,630
= $23,789
Degree of financial leverage = EBIT / EBT
= $40,419 / $23,789
= 1.70
Degree of financial leverage = % change in EPS / % change in operating profit
1.70 = % change in EPS / 3.4%
% change in profit = 1.70 * 3.4%
= 5.78%
