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Basic Question 8 of 19
A firm has EBIT of $20 million, interest expense of $8 million, and faces a tax rate of 40 percent. There are 15 million shares outstanding. The increase in EPS resulting from a 10% increase in EBIT would be closest to a ______ increase.
B. 14%
C. 17%
A. 10%
B. 14%
C. 17%
User Contributed Comments 11
| User | Comment |
|---|---|
| rockeR | How about this method? EBIT/(EBIT-I)=(%change in EPS)/(%change in EBIT) So, 20/(20-8)=X/10% Hence, X=%change in EPS=0.166x=17% increase |
| xiong | It is a good idea to use DFL |
| katybo | is the best way... |
| MaiHuong | Another method DFL = EBIT/(EBIT-Interest) = 20/12 = 1.667 DFL = %change of net income/%change of operating income EBIT increase 10% --> net income increase 1.667*0.1 = 16.7% nuber of stock remain --> EPS increase 16.7% |
| auhjpps | yeah the method used by maihoung is the better one |
| 2014 | good solution maihuong |
| johntan1979 | Yeah, I used the DFL method too. So much faster. |
| jonan203 | i love how they give us the DFL formula and use a method that takes ten times longer to get the same answer |
| leon121 | good job maihuong |
| cfastudypl | Both rockeR and MaiHuong methods are one and the same and is the same method I used. AN method for this question is long and will waste your time in the exam. In any case, use the method you understand best. |
| walterli | easy one? 20*10%/?20-8?=16.67% |
Your review questions and global ranking system were so helpful.
Lina
Learning Outcome Statements
explain factors affecting capital structure and the weighted-average cost of capital
CFA® 2024 Level I Curriculum, Volume 2, Module 6.