Question

The Harding Company manufactures skates. The company’s income statement for 20X1 is as follows:

HARDING COMPANY Income Statement For the year ended December 31, 20X1
Sales (10,500 skates at \(60 each)	\)630,000
Less: variable costs (10,500 tires at \(25)	262,500
Less: fixed cost	200,000
Earnings before interest and taxes (EBIT)	\)167,500
Interest expenses	62,500
Earning before taxes (EBT)	\(105,000
Income tax expenses (30%)	31,500
Earning after taxe (EAT)	\)73,500

Given this income statement, compute the following:

b. Degree of financial leverage.

Short answer

The degree of financial leverage is 1.60.

Step-by-step solution

Earnings before interest and taxes

Earning before interest and taxes mean the income of the company before paying the finance cost and the income tax liability of the company.

Degree of financial leverage leverage

$\begin{array}{rcl}\mathrm{Degree}\mathrm{of}\mathrm{financial}\mathrm{leverage}& =& \frac{\mathrm{EBIT}}{\mathrm{EBIT}-\mathrm{Interest}}\\ & =& \frac{\$167,500}{\$167,500-\$62,500}\\ & =& 1.60\end{array}$