Parker Investment's Degree of Financial Leverage
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Parker Investments has EBIT of $15,000, interest expense of $1,940 and preferred dividends of $2,738. If it pays taxes at a rate of 27%, what is Parker's degree of financial leverage (DFL) at a base level of EBIT of $15,000?
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Solution Summary
The expert computes degree of financial leverage (DFL) at a base level of EBIT.
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EBIT= $ 15,000
Interest = $ 1,940
Preferred dividends= $ 2,738
Tax rate = 27%
Degree of financial leverage = EBIT / (EBIT- Interest - Preferred dividends / (1-tax rate))
=15000/(15000-1940-2738/(1-0.27)) = 1.6113 ...
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