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| Carlisle Company currently sells 400,000 bottles of perfume each year. Each bottle costs $.84 to produce and sells for $1.00. Fixed costs are $28,000 per year. The firm has annual interest expense of $6,000, preferred stock dividends of $2,000 per year, and a 40% tax rate. Carlisle uses the following formulas to determine the company's leverage. Operating leverage = [Q(S - VC)] ÷ [Q(S - VC) - FC] Financial leverage = EBIT ÷ {EBIT - I - [P / (1 - T)]} Total leverage = Q(S - VC) ÷ {(S - VC) - FC - I - [P / (1 - T)]} Where: Q=Quantity FC=Fixed Cost VC=Variable Cost S=Selling Price I=Interest Expense P=Preferred Dividends T=Tax Rate EBIT=Earnings Before Interest and Taxes The degree of financial leverage for Carlisle Company is B. 2.3 C. 1.78 D. 2.4 |