Answer (B) is correct . The degree of financial leverage (DFL) equals earnings before interest and taxes (EBIT) divided by earnings before taxes. Sahara’s can be calculated as follows: Sales $15,000,000 ? Cost of goods sold (9,000,000) Operating expenses (3,000,000) EBIT $? 3,000,000 Interest expense (800,000) Earnings before taxes $? 2,200,000 Taxes (880,000) Net income $??1,320,000 DFL = EBIT ÷ Earnings before taxes = $3,000,000 ÷ $2,200,000 = 1.36
Answer (A) is incorrect because The degree of financial leverage is calculated by dividing earnings before interest and taxes by earnings before taxes.
Answer (C) is incorrect because The degree of financial leverage is calculated by dividing earnings before interest and taxes by earnings before taxes.
Answer (D) is incorrect because The figure 2.27 results from improperly using net income in the denominator.
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Based on the above information, Sahara’s degree of financial leverage is
