# Calculate the EPS & DFL for each financing plan (i.e. 4 calculations). Total funding needed...

## Question:

Calculate the EPS & DFL for each financing plan (i.e. 4 calculations).

Plan A Plan B
i ii i ii
Total Funding Needed
Debt
Equity
EBIT 10,000 30,000 10,000 30,000

Total funding needed $350,000 Interest rate on debt 6.5% Common stock price per share$15

Plan A Debt 30%

Plan B Debt 60%

Tax rate 35%

## Degree of financial leverage

The degree of financial leverage (DFL) measures the sensitivity of how to fluctuate the operating income of the company caused the changes in its capital structure. It is the common method to quantify the financial risk of the business.

DFL can be calculated as:

DFL = EBIT/(EBIT - interest)

• Total funding needed $350,000 • Interest rate on debt 6.5% • Common stock price per share$15
• Plan A Debt 30%
• Plan B Debt 60%
• Tax rate 35%

 Plan A Plan B i ii i ii Total Funding Needed $350,000$ 350,000 $350,000$ 350,000 Debt $105,000$ 105,000 $210,000$ 210,000 Equity $245,000$ 245,000 $140,000$ 140,000 EBIT 10,000 30,000 10,000 30,000 Less, Interest @6.5% $6,825$ 6,825 $13,650$ 13,650 Profit before tax $3,175 23,175 -3,650 16,350 Tax@35%$ 1,111 8,111 0 5,723 Net Profit $2,064$ 15,064 -$3,650$ 10,628 Common stock price $15$ 15 $15$ 15 No of shares o/s 16,333 16,333 9,333 9,333 EPS = Net profit/No of shares $0.13$ 0.92 -$0.39$ 1.14 DFL = EBIT/(EBIT-Interest) 3.15 1.29 -2.74 1.83 