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Northwestern Savings and Loan has a current capital structure consisting of $240,000 of 15% (annual interest) debt and 2,000 shares of common stock. The firm
Northwestern Savings and Loan has a current capital structure consisting of $240,000 of 15% (annual interest) debt and 2,000 shares of common stock. The firm pays taxes at the rate of 24% a. Using EBIT values of $82,000 and $125,000, determine the associated earnings per share (EPS). The calculation of the EPS for EBIT value of $82,000: EBIT Less: Interest Net profits before taxes Less: Taxes (30%) Net profit after taxes EPS (3,000 shares) The calculation of the EPS for EBIT value of $125,000 EBIT Less: Interest Net profits before taxes Less: Taxes (30%) Net profit after taxes EPS (3,000 shares) b. Using $82,000 of EBIT as a base, calculate the degree of financial leverage (DFL). C. Rework parts a and b assuming that the firm has $100,000 of 15% (annual interest) debt and 3,000 shares of common stock The calculation of the EPS for EBIT value of $82,000: EBIT Less: Interest Net profits before taxesS Less: Taxes (30%) Net profit after taxes EPS (4,000 shares) The calculation of the EPS for EBIT value of $125,000 EBIT Less: Interest Net profits before taxes S Less: Taxes (30%) Net profit after taxes EPS (4,000 shares)
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