1. It is December 31. Last year, Water and Power Company (W&P) had sales of $80,000,000, and it forecasts that next years sales will be $86,400,000. Its fixed costs have beenand are expected to continue to be$44,000,000, and its variable cost ratio is 20.00%. W&Ps capital structure consists of a $15 million bank loan, on which it pays an interest rate of 12%, and 5,000,000 shares of outstanding common equity. The companys profits are taxed at a marginal rate of 35%. Given this data, compute the following:

Note: For these computations, round each value to two decimal places.

	The companys percentage change in EBIT is (23.04%, 30.72%, 25.60%)
	The percentage change in W&Ps earnings per share (EPS) is (27.85%, 22.28%, 38.99%) .
	The degree of financial leverage (DFL) at $86,400,000 is (3.2, 1.09, 3.48)

2. Consider the following statement about DFL, and indicate whether or not it is correct.

Assume that at a given level of sales, the firms DFL is 4.50. This means that a 1% decrease in the firms EBIT will result in a corresponding 4.5% increase in the firms EBIT.

True

False