question archive (b) Upbeat Berhad has a current capital structure consisting of RM150,000 of 15% debt and 3,500 shares of common stock
(b) Upbeat Berhad has a current capital structure consisting of RM150,000 of 15% debt and 3,500 shares of common stock
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(b) Upbeat Berhad has a current capital structure consisting of RM150,000 of 15% debt and 3,500 shares of common stock. The tax rate is 40%. (i) Determine the earnings per share (EPS) when the earnings before interest and tax (EBIT) is RM75,000 and RM99,000. (7 marks) (ii) Calculate the degree of financial leverage (DFL) using EBIT of RM75,000 as a base. (2 marks) (iii) How would you interpret the Upbeat Berhad's DFL? (2 marks)
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| A | B | |
| EBIT | RM75000 | RM99000 |
| less Intrest (150000 * 15% = 22500) | 22500 | 22500 |
| EBT | 52500 | 76500 |
| less Tax(40%) | 21000 | 30600 |
| EAT | 31500 | 45900 |
| No.of Shares | 3500 | 3500 |
| EPS | 9 | 13.12 |
Debt Intrest = 150000 * 15% = 22500
(i) EPS = Earnings Avalible to Equity Shareholders / No of Equity shares
Here,
Earnings Avalible to Equity Shareholders = EAT
So
EPS of A = 31500 / 3500
= 9
EPS of B = 45900 / 3500
= 13.12
(ii) Degree of financial leverage (DFL) using EBIT of RM 75000 as base = EBIT / EBT
= 75000 / 52500
= 1.43
Degree of financial leverage (DFL) using EBIT of RM 99000 as base = EBIT / EBT = 99000 / 76500
= 1.30
(iii) Degree of Financial leverage of Upbeat Berhad is more when EBIT is RM 75000
