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Chapter 2: 10BP_b (page 147)

The Sterling Tire Company鈥檚 income statement for 20X1 is as follows:

STERLINE TIRE COMPANY

Income Statement

For the year ended December 31, 20X1

Sales (20,000 tires at \(60 each)

\)1,200,000

Less: variable costs (20,000 tires at \(30)

600,000

Less: fixed cost

400,000

Earnings before interest and taxes (EBIT)

\)200,000

Interest expenses

50,000

Earning before taxes (EBT)

\(150,000

Income tax expenses (30%)

45,000

Earning after taxe (EAT)

\)105,000

Given this income statement, compute the following:

b. Degree of financial leverage.

Short Answer

Expert verified

The degree of financial leverage is 1.33.

Step by step solution

01

Financial leverage

Financial leverage is computed to measure the company鈥檚 ability to meet its financial obligations.

02

Degree of financial leverage leverage

Degreeoffinancialleverage=EBITEBIT-Interest=$200,000$200,000-$50,000=1.33

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Most popular questions from this chapter

Martin Electronics has an accounts receivable turnover equal to 15 times. If accounts receivable are equal to $80,000, what is the value for average daily credit sales?

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