Compute the DFL for the Merck Photocopiers , if they operate at an EBIT level of $150,000, have interest cost of $45000 and need to pay a fixed dividend of $4 on 1000 Preferred stock

Finance Dec 09, 2020

Compute the DFL for the Merck Photocopiers , if they operate at an EBIT level of $150,000, have interest cost of $45000 and need to pay a fixed dividend of $4 on 1000 Preferred stock. The company comes in a 35% tax bracket.

Expert Solution

Degree of Financial Leverage = EBIT / (EBIT - interest)

here,

EBIT = $150,000

interest = $45,000

Degree of Financial Leverage = $150,000 / ($150,000-45,000)

=>1.42857143

=>1.43 (if rounded to two decimals).

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