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Unformatted text preview: ed costs, both operating and financial, to magnify the effect of
changes in sales on the firm’s earnings per share. Total leverage can therefore be
viewed as the total impact of the fixed costs in the firm’s operating and financial
Cables Inc., a computer cable manufacturer, expects sales of 20,000 units at $5
per unit in the coming year and must meet the following obligations: variable
operating costs of $2 per unit, fixed operating costs of $10,000, interest of
$20,000, and preferred stock dividends of $12,000. The firm is in the 40% tax
bracket and has 5,000 shares of common stock outstanding. Table 12.7 presents
10. By using the formula for DFL in Equation 12.7, it is possible to get a negative value for the DFL if the EPS for the
base level of EBIT is negative. Rather than show absolute value signs in the equation, we instead assume that the
base-level EPS is positive. CHAPTER 12 TABLE 12.7 Leverage and Capital Structure 519 The Total Leverage Effect
50% Sales (in uni...
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