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It is December 31. Last year, Water and Power Company (W&P) had sales of $80,000,000, and it forecasts that next year's sales will be $86,400,000. Its fixed costs have been-and are expected to continue to be-$36,000,000, and its variable cost ratio is 15.00%. W&P'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%. 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) Given this information, complete the following sentences: The company's percentage change in EBIT is The percentage change in W&P's earnings per share (EPS) is The degree of financial leverage (DFL) at $86,400,000 is (Hint: Use the changes in EPS and EBIT that you computed to determine DFL.) 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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