Question

The records of Marshall Company include the following: Average total assets $4,250,000 Average total liabilities 1,970,000 Total revenue 4,330,000 Total expense (including income tax) 3,950,000 Interest expense (included in total expenses) 105,000 Income tax rate 40% The financial leverage percentage is closest to:

Answer 1

Degree of Financial Leverage

Degree of Financial Leverage is calculated by using the following formula

Degree of Financial Leverage = EBIT / EBT

Total Revenue = $4,330,000

Total Expenses (including income tax) = $3,950,000

Net Income After-Tax = $380,000

Earnings Before Tax (EBT) = $6,33,333 [$380,000 / (1 – 0.40)]

Earnings Before Interest & Tax (EBIT) = Earnings Before Tax (EBT) + Interest Expenses

= $6,33,333 + 150,000

= $7,38,333

Therefore, The Degree of Financial Leverage = [EBIT / EBT] x 100

= [$7,38,333 / $6,33,333] x 100

= 116.58%

“Hence, The financial leverage percentage would be closest to 116.58%”