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Calculate the degree of financial leverage in base year

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Reference no: EM131876945

Question - 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?

Reference no: EM131876945

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