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It is December 31 Last year, Torres Industries had sales of $120,000,000, and it forecasts that next year’s sales will be $114,000,000
It is December 31 Last year, Torres Industries had sales of $120,000,000, and it forecasts that next year’s sales will be $114,000,000. Its fixed costs have been—and are expected to continue to be—$72,000,000, and its variable cost ratio is 1.00%. Torres’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%. Given this data, complete the following sentences:
Note: Round intermediate calculations to two decimal places.
| • | The company’s percentage change in EBIT is ________? |
| • | The percentage change in Torres’s earnings per share (EPS) is ________ ? |
| • |
The degree of financial leverage (DFL) at $114,000,000 is _______? Assume that a firm’s fixed capital costs remain constant across a range of operating profit (EBIT) values. The firm’s DFL will vary across the range of EBIT values. True False |
Expert Solution
Solution
| PARTICULARS | LAST YEAR | NEXT YEAR |
| Sales | 120,000,000 | 114,000,000 |
| Less: Variable Cost | 1200000 | 1140000 |
| Less: Fixed Cost | 72,000,000 | 72,000,000 |
| EBIT | 46,800,000 | 40,860,000 |
| Less:Interest(15,000,000*8%) | 1200000 | 1200000 |
| EBT | 45,600,000 | 39,660,000 |
| Tax @40% | 18240000 | 15864000 |
| Profit After tax | 27,360,000 | 23,796,000 |
| EPS(PAT/No of Shares) | 36.48 | 31.73 |
The company’s percentage change in EBIT = (EBIT of Next year - EBIT of last year)/EBIT of last year*100
- The company’s percentage change in EBIT = (EBIT of Next year - EBIT of last year)/EBIT of last year*100
- (40860000-46800000)/46800000*100
- -12.69%
The percentage change in Torres’s earnings per share (EPS) is
- The percentage change in EPS = EPS of Next year - EPS of last year)/EPS of last year*100
- (31.73 - 36.48)/36.48*100
- -13.02%
The degree of financial leverage (DFL) at $114,000,000
- DFL = EBIT/EBT
- DFL = 40860000/39660000
- DFL = 1.03
Assume that a firm’s fixed capital costs remain constant across a range of operating profit (EBIT) values. The firm’s DFL will vary across the range of EBIT values.
ANSWER - TRUE, as the DFL is also getting affected due to variable cost and interest cost.
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