Unformatted text preview: costs are $3.00 per unit, and its fixed
operating costs are $250,000. Annual interest charges total $80,000, and the
firm has 8,000 shares of $5 (annual dividend) preferred stock outstanding. It
currently has 20,000 shares of common stock outstanding. Assume that the firm
has a 40% tax rate.
a. At what level of sales (in units) would the firm break even on operations (that
is, EBIT $0)?
b. Calculate the firm’s earnings per share (EPS) in tabular form at (1) the current level of sales and (2) a 120,000-unit sales level.
c. Using the current $750,000 level of sales as a base, calculate the firm’s degree
of operating leverage (DOL). CHAPTER 12 Leverage and Capital Structure 545 d. Using the EBIT associated with the $750,000 level of sales as a base, calculate the firm’s degree of financial leverage (DFL).
e. Use the degree of total leverage (DTL) concept to determine the effect (in percentage terms) of a 50% increase in TOR’s sales from the $750,000 base
level on its earnings per share.
LG5 LG3 ST 12–2 EBIT–EPS analysis Newlin Electronics is considering additional financing of
$10,000. It currently has $50,000 of 12% (an...
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