Question

Aruz Berhad sells its product at RM45 per unit. Fixed cost per year is RM220,000 while variable cost is RM15 per unit. The firm has debt capital of RM450,000 and its interest rate is 7%. Firm tax rate is 30% and the total number of shares issued is 300,000 units.

You are required to:

1. Calculate earnings before interest and tax (EBIT) and earnings per share (EPS) at total sales of 15,000 units.   
2. Calculate the degree of financial leverage at sales level of 15,000 units.

Answer 1

a) Calculation of EBIT at 15,000 units of sales :

Particulars	Calculation	Amount
Sales (A)	15,000*45	675,000
(-) Variable cost (B)	15,000*15	225,000
(-) Fixed costs (C)		220,000
EBIT (D) (A-B-C)		230,000
Interest (E)	450,000*7%	31,500
EBT (F) (D-E)		198,500
Tax @30% (G)	198,500*30%	59,550
Net Income (H) (F-G)		138,950

EBIT = 198,500

EPS = Net income/No.of shares

No.of shares = 300,000

EPS = 138,950/300,000

= 0.46

b) Degree of financial leverage at 15,000 units:

Financial Leverage = EBIT/EBT

= 230,000/198,500

= 1.16