Question

# Aruz Berhad sells its product at RM45 per unit. Fixed cost per year is RM220,000 while...

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.

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