$2.$ The computation and interpretation of the degree of financial leverage $($DFL$)$

It is December $31.$ Last year, Water and Power Company $($W&P$)$ had sales of $$160,000,000,$ and it forecasts that next year$$s sales will be $$172,800,000.$ Its fixed costs have been$$and are expected to continue to be$$$$72,000,000,$ and its variable cost ratio is $10\mathrm{.}00\%.$ W&P$$s capital structure consists of a $$15$ million bank loan, on which it pays an interest rate of $12\%,$ and $5,000,000$ shares of outstanding common equity. The company$$s profits are taxed at a marginal rate of $35\%.$ Given this data, compute the following:

Note: Round intermediate calculations to two decimal places.

$$ The company$$s percentage change in EBIT is $.$

$$ The percentage change in W&P$$s earnings per share $($EPS$)$ is $.$

$$ The degree of financial leverage $($DFL$)$ at $$160,000,000$ is $.$

The following are the two principal equations that can be used to calculate a firm$$s DFL value:

DFL $($at EBIT $=$ $X$)=$ Percentage Change in EPSPercentage Change in EBIT

DFL $($at EBIT $=$ $X$)=$ EBIT$\{$EBIT $$ Interest $[$Preferred Dividends $/(1$ Tax Rate$)]\}$

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

Assume that a firm$$s fixed capital costs remain constant across a range of operating profit $($EBIT$)$ values. The firm$$s DFL will vary across the range of EBIT values.

False

True