The following is a list of selected information for Liverpool Co. for the fiscal year. Forecasted Operations Sales...

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Finance

The following is a list of selected information for LiverpoolCo. for the fiscal year.
Forecasted Operations
Sales with 30.00% Increase
Unit Change
Sales in units (millions) 200 260 60
Earnings before interest and taxes (EBIT) 4,000.00 5,600.00 1,600.00
Less: Interest (150.00) (150.00) (0.00)
Earnings before taxes $3,850.00 $5,450.00 $1,600.00
Less: Taxes (40%) 1,540.00 2,180.00 (0.00)
Net income 2,310.00 3,270.00 960.00
Earnings per share (20 million shares) $115.50 $163.50 $48.00
You are an employee for Liverpool Co., and your boss needs helpassessing the level of risk associated with the firm’s currentfinancial position. Begin by calculating the degree of financialleverage for the change between forecasted operations and theoperational increase of 30.00%.
0.60X
1.04X
0.42X
1.03X
Your boss says, “Looking good so far. However, I would like toknow how we stack up against our strongest competitor, Everton Co.”Compare the degree of operating leverage of Everton Co. with thatof Liverpool Co. and then answer the following question.
All else being equal, is Liverpool Co. more risky than, lessrisky than, or as equally risky as Everton Co., considering thatthe degree of financial leverage for Everton Co. is 1?
Not enough information given
More risky
Less risky

	Forecasted Operations	Sales with 30.00% Increase	Unit Change
Sales in units (millions)	200	260	60
Earnings before interest and taxes (EBIT)	4,000.00	5,600.00	1,600.00
Less: Interest	(150.00)	(150.00)	(0.00)
Earnings before taxes	$3,850.00	$5,450.00	$1,600.00
Less: Taxes (40%)	1,540.00	2,180.00	(0.00)
Net income	2,310.00	3,270.00	960.00
Earnings per share (20 million shares)	$115.50	$163.50	$48.00

Answer & Explanation Solved by verified expert

3.7 Ratings (524 Votes)

change in EBIT change in EBIT Original EBIT 1600 4000 40 change in EPS change in EPS Original EPS 48 11550 4156 Hence degree of financial leverage DFL change in EPS change in EBIT 4156 40 See Answer

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The following is a list of selected information for LiverpoolCo. for the fiscal year.Forecasted OperationsSales with 30.00% IncreaseUnit ChangeSales in units (millions)20026060Earnings before interest and taxes (EBIT)4,000.005,600.001,600.00Less: Interest(150.00)(150.00)(0.00)Earnings before taxes$3,850.00$5,450.00$1,600.00Less: Taxes (40%)1,540.002,180.00(0.00)Net income2,310.003,270.00960.00Earnings per share (20 million shares)$115.50$163.50$48.00You are an employee for Liverpool Co., and your boss needs helpassessing the level of risk associated with the firm’s currentfinancial position. Begin by calculating the degree of financialleverage for the change between forecasted operations and theoperational increase of 30.00%.0.60X1.04X0.42X1.03XYour boss says, “Looking good so far. However, I would like toknow how we stack up against our strongest competitor, Everton Co.”Compare the degree of operating leverage of Everton Co. with thatof Liverpool Co. and then answer the following question.All else being equal, is Liverpool Co. more risky than, lessrisky than, or as equally risky as Everton Co., considering thatthe degree of financial leverage for Everton Co. is 1?Not enough information givenMore riskyLess risky