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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. find out 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?

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M946383

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