It is December 31. Last year, Galaxy Corporation had sales of $80,000,000, and it forecasts...
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It is December 31. Last year, Galaxy Corporation had sales of $80,000,000, and it forecasts that next year's sales will be $89, 600,000. Its fixed costs have been-and are expected to continue to be-$44,000,000, and its variable cost ratio is 20.00%. Galaxy's capital structure consists of a $15 million bank loan, on which it pays an interest rate of 12%, and 5,000,000 shares of outstanding common equity. The company's profits are taxed at a marginal rate of 35%. Given this data, compute the following: The company's percentage change in EBIT is _____. The percentage change in Galaxy's earnings per share (EPS) is _____. The degree of financial leverage (DFL) at $89, 600,000 is _____. The following are the two principal equations that can be used to calculate a firm's DFL value: DFL (at EBIT = $x) = Percentage Change in EPS/Percentage Change in EBIT DFL (at EBIT = $x) = EBIT/{EBIT - Interest - [Preferred Dividends/(1 - Tax Rate)]} Consider the following statement about DFL, and indicate whether or not it is correct. All other factors remaining constant, the larger the proportion of common equity used by the firm in its capital structure, the smaller the firm's DFL True False
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