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    Finance: DFL and EBIT

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    Illinois Tool Company's (ITC) fixed operating costs are $1,260,000 and its variable cost ratio (ie. variable costs are as a fraction of sales) is 0.70. The firm has $3,000,000 in bonds outstanding at an interest rate of 8%. ITC has 30,000 shares of $5 preferred stock and 150,000 shares of common stock outstanding. ITC is in the 50% corporate income tax bracket. Forecasted sales for next year are $9 million.

    What is the ITC's degree of financial leverage (DFL) at an EBIT level of $1,440,000?

    The answer to this problem is one of the following:
    a. 1.20
    b. 2.40
    c. 3.00
    d. 1.60

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    Solution Summary

    This solution neatly illustrates how to calculate the degree of financial leverage (DFL) before taxes at a specific EBIT level. All calculations and the necessary equation is provided.