A firm has EBIT of R375,000, interest expense of R75,000, preferred dividends of R6,000 and a tax rate of 40 percent. The firm's degree of financial leverage at a base EBIT level of R375,000 is ________.

Question

0.97
1.29
1.27
1.09

Answer 1

1.27

Degree of financial leverage (DFL) = EBIT / (EBIT - Interest Expense)

DFL = 375,000 / (375,000 - 75,000)
DFL = 375,000 / 300,000
DFL = 1.27

Therefore, the firm's degree of financial leverage at a base EBIT level of R375,000 is 1.27.