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

It is December 31. Last year, Campbell Construction had sales of $80,000,000, and it forecasts that next years sales will be $76,000,000. Its fixed costs have beenand are expected to continue to be$40,000,000, and its variable cost ratio is 11.00%. Campbells capital structure consists of a $15 million bank loan, on which it pays an interest rate of 8%, and 750,000 shares of common equity. The companys profits are taxed at a marginal rate of 40%. Given this data, complete the following sentences:

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

	The companys percentage change in EBIT is .
	The percentage change in Campbells earnings per share (EPS) is .
	The degree of financial leverage (DFL) at $76,000,000 is .

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.

False

True