Geoff's Golf Clubs: degree of financial leverage; breakeven point
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Problem Set 5
Please answer the following questions in the space provided. You may insert additional lines as necessary in order to complete your response fully.
1. Geoff's Golf Clubs is considering purchasing a small firm in the same line of business. The purchase would be financed by the sale of common stock or a bond issue. The financial manager needs to evaluate how the two alternative financing plans will affect the earnings potential of the firm. Total financing required is $4.5 million. The firm currently has $20,000,000 of 12 percent bonds and 600,000 common shares outstanding. The firm can arrange financing of the $4.5 million through a 14 percent bond issue or the sale of 100,000 shares of common stock. The firm has a 40 percent tax rate.
(a) What is the degree of financial leverage for each plan at $7,000,000 of EBIT?
Is it possible to use the following formula to answer this question? If so how?
DFL = percentage change in EPS / percentage change in EBIT
(b) What is the financial breakeven point for each plan?
Is it possible to use the following formula to answer this question? If so how?
EBIT = (P*Q) - FC - (VC*Q) where
P = sale price per unit
Q = sales quantity in units
FC = fixed operating cost per period
VC = variable operating cost per unit
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Solution Summary
The degree of financial leverages and breakeven points are examined.
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Problem Set 5
Please answer the following questions in the space provided. You may insert additional lines as necessary in order to complete your response fully.
1. Geoff's Golf Clubs is considering purchasing a small firm in the same line of business. The purchase would be financed by the sale of common stock or a bond ...
Education
- B. Sc., University of Nigeria
- M. Sc., London South Bank University
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