P 9-2 A firm has earnings before interest and tax of $1,000,000, interest of $200,000, and

net income of $400,000 in Year 1.

Required

a. Calculate the degree of financial leverage in base Year 1.

b. If earnings before interest and tax increase by 10% in Year 2, what will be the new

level of earnings, assuming the same tax rate as in Year 1?

c. If earnings before interest and tax decrease to $800,000 in Year 2, what will be the

new level of earnings, assuming the same tax rate as in Year 1?