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A firm has earnings before interest and tax of $1,000,000, interest of $200,000, and
net income of $400,000 in Year 1.
a. Calculate the degree of financial leverage in base Year 1.
b. If earnings before interest and tax increase by 10% in Year 2, what will be the new
level of earnings, assuming the same tax rate as in Year 1?
c. If earnings before interest and tax decrease to $800,000 in Year 2, what will be the
new level of earnings, assuming the same tax rate as in Year 1?
Solutiona Net IncomeIncome TaxEarnings Before TaxInterest ExpenseEarnings Before Interest and Tax 4000004000008000002000001000000 Financial leverage = EBIT / EBTFinancial leverage =EBIT…
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