Financial Leverage

Financial Leverage - FinancialLeverage:byusingfixedcost...

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Financial Leverage:   by using fixed cost  financing (i.e. debt or preferred stock), a  small change in operating income  is  magnified into a larger change in  earnings per share . This  “multiplier effect”  is called the  degree of financial leverage (DFL). Example #1: DFL = 3 1% increase in operating income   (EBIT)  will result in a  3% increase in   earnings per share (EPS) . Example #2: DFL = 4 1% increase in operating income   (EBIT)  will result in a  4% increase in   earnings per share (EPS) . If we have the data, we can use this  formula:
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Falcone, Inc. has a base level of sales of  150,000  units .  Sales price per unit is  $10  and variable  cost per unit is  $6.50 .  Total annual operating  fixed costs are  $155,000  and annual interest  expense is  $90,000 .  What is the degree of  financial leverage for Falcone, Inc.?
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Financial Leverage - FinancialLeverage:byusingfixedcost...

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