Compute the degree of financial leverage for a firm with EBIT of P6,000,000, fixed costs of P3,000,000, interest expense of P1,000,000, preferred stock dividends of P800,000 and a 40% tax rate. a. 1.2 b. 1.11 c. 1.43 d. 1.64

Compute the degree of financial leverage for a firm with EBIT of P6,000,000, fixed costs of P3,000,000, interest expense of P1,000,000, preferred stock dividends of P800,000 and a 40% tax rate. a. 1.2 b. 1.11 c. 1.43 d. 1.64

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter9: The Cost Of Capital

Section: Chapter Questions

Problem 7P

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Question

Compute the degree of financial leverage for a firm with EBIT of P6,000,000, fixed costs of P3,000,000, interest expense of P1,000,000, preferred stock dividends of P800,000 and a 40% tax rate.

a. 1.2

b. 1.11

c. 1.43

d. 1.64

Definition Definition Type of stock which is granted priority over dividend distributions as compared to common stockholders. Preferred stocks also do not carry any voting rights. Notably, in a case where a company is going to be liquidated, preferred stockholders have a priority claim on the value of assets of the company as quoted in the balance sheet, as compared to the common stockholders.

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