9 Financial Gearing. The financial manager of Eden Enterprises, a garden design and supply company, expects the business to have earnings before interest and taxes

(EBIT) of £180,000 in the current financial year. The company pays annual interest of 12 per cent on a long-term loan of £500,000 and has 50,000 ordinary shares in issue.

The financial manager has asked for your help in examining two scenarios, one where EBIT is 20 per cent less than expected and the second where EBIT is 20 per cent greater than expected.

You are required to produce a table clearly showing the effects of the financial scenarios on the company’s expected earnings per share and to calculate the company’s degree of financial gearing (DFG). Assume a tax rate of 25 per cent.