6. The computation and interpretation of the degree of financial leverage (DFL) It is December 31. Last year, Galaxy Corporation had sales of $80,000,000, and it forecasts that next year's sales will be $86,400,000. Its fixed costs have been-and are expected to continue to be-$44,000,000, and its variable cost ratio is 20.00%. Galaxy'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: For these computations, round each EPS to two decimal places. The company's percentage change in EBIT is The percentage change in Galaxy's earnings per share (EPS) is The degree of financial leverage (DFL) at $86,400,000 is. The following are the two principal equations that can be used to calculate a firm's DFL value: Percentage Change in EPS DFL (at EBIT = SX) = Percentage Change in EBIT DFL (at EBIT = $X) = EBIT-Interessered Dinsidende Taxilare! Consider the following statement about DFL, and indicate whether or not it is correct. Assume that at a given level of sales, the firm's DFL is 4.50. This means that a 1% decrease in the firm's EBIT will result in a Consider the following statement about DFL, and indicate whether or not it is correct. Assume that at a given level of sales, the firm's DFL is 4.50. This means that a 1% decrease in the firm's EBIT will result in a corresponding 4.5% increase in the firm's EBIT. False True 6. The computation and interpretation of the degree of financial leverage (DFL) It is December 31. Last year, Galaxy Corporation had sales of $80,000,000, and it forecasts that next year's sales will be $86,400,000. Its fixed costs have been-and are expected to continue to be-$44,000,000, and its variable cost ratio is 20.00%. Galaxy'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: For these computations, round each EPS to two decimal places. The company's percentage change in EBIT is The percentage change in Galaxy's earnings per share (EPS) is The degree of financial leverage (DFL) at $86,400,000 is. The following are the two principal equations that can be used to calculate a firm's DFL value: Percentage Change in EPS DFL (at EBIT = SX) = Percentage Change in EBIT DFL (at EBIT = $X) = EBIT-Interessered Dinsidende Taxilare! Consider the following statement about DFL, and indicate whether or not it is correct. Assume that at a given level of sales, the firm's DFL is 4.50. This means that a 1% decrease in the firm's EBIT will result in a Consider the following statement about DFL, and indicate whether or not it is correct. Assume that at a given level of sales, the firm's DFL is 4.50. This means that a 1% decrease in the firm's EBIT will result in a corresponding 4.5% increase in the firm's EBIT. False True
