Degree of FinanciaL Leverage EXAMPLE

Degree of FinanciaL Leverage EXAMPLE - EBIT 12 4-66.7% 20...

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Financial Leverage EXAMPLE Assume: Technology 1 (T1) Expected 20XX EBIT = $12 (from example of Operating Leverage, T1) Low Debt: $20 debt @ 10% (LD) $80 equity in $2 shares => 40 shares outstanding High Debt: $60 debt @ 10% (HD) $40 equity in $2 shares => 20 shares outstanding Expected Alternate Levels of EBIT 20XX 20XX' % 20XX'' % LD: EBIT 12 4 -66.7% 20 66.7% I - 2 - 2 -0- - 2 -0- EBT 10 2 -80% 18 80% T(50%) - 5 - 1 " - 9 " NI 5 1 " 9 " # shares 40 40 --- 40 --- EPS .125 .025 -80% .225 80% HD:
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Unformatted text preview: EBIT 12 4-66.7% 20 66.7% I- 6- 6-0-- 6-0-EBT 6- 2-133.3% 14 133.3% T(50%)*- 3- (-1) "- 7 " NI 3-1 " 7 " # shares 20 20--20---EPS .15- .05-133.3% .35 133.3% DFL(T1,LD) = = % 7 . 66 % 80 = 1.20 = = 2 12 12-= 1.20 DFL(T1,HD) = = 6 12 12-= 2.00 * In the event of a negative EBT and thus a negative tax (T), assume a tax credit, i.e., an addition to net income (NI) in the amount of the negative tax....
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This note was uploaded on 08/22/2009 for the course FIN 3310 taught by Professor Potts during the Spring '08 term at Baylor.

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