Question

A company has 3 million shares outstanding at a market price of $10/share. They have 9,000 bonds outstanding, each with a par value of $1000. The current market price is $950. The annual coupon rate on the bonds is 7%. EBIT for the year is $4,400,000. You may treat the coupon payment as interest expense. What is the degree of financial leverage (DOFL)?

Answer 1

The degree of financial leverage (DOFL) measures the sensitivity of a company's earnings per share (EPS) to changes in its earnings before interest and taxes (EBIT). However, we need more information to calculate the DOFL in this specific scenario.

Step-by-step explanation:

The degree of financial leverage (DOFL) measures the sensitivity of a company's earnings per share (EPS) to changes in its earnings before interest and taxes (EBIT). It is calculated by dividing the percentage change in EPS by the percentage change in EBIT. The formula for DOFL is: DOFL = (% change in EPS) / (% change in EBIT).

To calculate the percentage change in EPS, we need to know the initial EPS and the new EPS. Similarly, to calculate the percentage change in EBIT, we need to know the initial EBIT and the new EBIT.

In this case, we are given the EBIT ($4,400,000) but we don't have the EPS values. Without the EPS values, we cannot calculate the percentage change in EPS and therefore cannot determine the DOFL.