Parker Investments has EBIT of $20,000, interest expense of $3,000, and preferred dividends of $4,000. If it pays taxes at a rate of 38%, what is Parker's degree of financial leverage (DFL) at a base level of EBIT of $20,000?

Parker Investments has EBIT of $20,000, interest expense of $3,000, and preferred dividends of $4,000. If it pays taxes at a rate of 38%, what is Parker's degree of financial leverage (DFL) at a base level of EBIT of $20,000?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 2P

See similar textbooks

Related questions

Q: a. The after-tax cost of debt using the approximation formula is______%.(Round to two…

A: Here, To Find: Part A. The after-tax cost of debt using the approximation formula =? Part B. WACC…

Q: A firm has total assets of $1 million and a debt ratio of 30%. Currently, it has sales of $2.5…

A: Working note:

Q: The financial breakeven point of Soillnc. is P90,000,while the tax rate applicable to the company is…

A: The financial breakeven can be calculated by using this equation EBITFinBE =Interest cost +Preffered…

Q: Bl Inc currently has earnings before interest and taxes of P3,000,000, a degree of combined leverage…

A: The degree of operating leverage can be used to estimate change in operating income with respect to…

Q: TRY Co., a company with 25% tax rate, has a free cash flow of P150,000,000 for the next year and is…

Q: Acetate, Inc. has equity with a market value of $20 million and debt with a market value of $10…

A: Debt to equity ratio = Debt Market value / Equity Market value

Q: what will be the new net income?

A: Financial leverage means the degree by which a company uses fixed income securities or outside…

Q: The tax rate applicable to Blue Co. is 20%. The firm pays 5% interest on the P350,000 outstanding…

A: Outstanding loan = P 350000 Interest rate = 5% Tax rate = 20% Preferred dividends = P 16500

Q: XYZ anticipates earning $1,800,000 and paying $300,000 in dividends this year. XYZ's capital…

A: equity break point=retained earningfraction of equity

Q: Vapor Lock Motors’ EBIT is $7,000,000, the company’s interest expense is $2,000,000, and its tax…

A: DFL means how much the earnings of a firm change due to change in the debt-equity ratio of the firm.…

Q: Rogers’ Rotors has debt with a market value of $250,000, preferred stock with a market value of…

A: WACC (weighted average cost of capital) refers to the average cost that is paid by a company to…

Q: Williamson, Inc., has a debt-equity ratio of 2. The firm's weighted average cost of capital is 10…

A: Given: Debt to equity = 2 WACC = 10% cost of equity re=21.6% tax = 30%

Q: What is the value of this firm?

A: Value of Levered Firm: It is estimated by the sum of the value of the unlevered firm and the…

Q: Blue Co., a company with 25% tax rate, has a free cash flow of P150,000,000 for the next year and is…

A: FCF1 = P 150,000,000 Growth rate (g) = 4% Debt to equity (D/E) = 0.25 Cost of debt = Rd = 5% Cost of…

Q: GTB, Inc. has a 25 percent tax rate and has $67.92 million in assets, currently financed entirely…

A: The cost of debt is 9%.The weight of debt in capital structure is 25%. So, the value of debt must be…

Q: You are analysing NBM firm and obtained the following information: FCFF reported as R198 million,…

A: FCFE is the free cash flow to the equity The formula for the same: FCFE = FCFF - Interest (1-tax…

Q: Finance, Inc. has equity with a market value of $30 million and debt with a market value of $15…

A: Since you have posted a question with multiple sub-parts, we will solve the first three subparts for…

Q: the winter wear company has expected earnings before interest and taxes of 2,100, and unlevered cost…

A: Computation of value of unlevered firm: The value of firm is $10,852.

Q: The W.C. Pruett Corp. has $600,000 of interest-bearing debt outstanding,and it pays an annual…

A: Given, The W.C. Pruett Corp. has $600,000 of interest-bearing debt outstanding,and it pays an annual…

Q: A firm has an net operating profit of P300,000, interest of P35,000, and a tax rate of 25%. The firm…

A: Net operating profit = P300,000 Before tax cost of debt (Kd) = 0.06 Cost of equity (Ke) = 0.15…

Q: Houston Tools has expected earnings before interest and taxes of $189,400, an unlevered cost of…

A: A levered firm is one which has debt and an unlevered firm is one which has no debt. We will use the…

Q: Hartman Motors has $18 million in assets, which were financed with$6 million of debt and $12 million…

A: Formula: Beta(levered) = Beta(unlevered) * [1 + {(1 -tax rate)*(Debt /Equity)}]

Q: The H.R. Pickett Corp. has $500,000 of debt outstanding, and it pays an annual interest rate of 10%.…

A: The times earned interest ratio is comparing the earnings before interest and taxes to interest…

Q: The ABC corp. is expected to have the earnings before interest and taxes of $60,000 and the…

A: Value of Unlevered firm (Vu)Vu=EBIT1-TRu where T= Tax rate, Ru=Unlevered cost of capital Value of…

Q: The ABC corp. is expected to have the earnings before interest and taxes of $60,000 and the…

A: As per MM proportion 2 value of unlevered firm will increase by present value of tax shield provided…

Q: The firm is financed with debt and equity. The book value of the debt is $10,000,000; the book value…

A: Weighted average cost of capital (WACC) refers to the average cost that is paid by a company to…

Q: Calculate the WACC for a firm that pays 10% on its debt, requires an 18% rate of return on its…

A: The Weighted average cost of capital(WACC) refers to the method in which each category of capital is…

Q: Using the WACC in practice: Maloney’s, Inc., has found that its cost of common equity capital is 17…

A: Weighted Average Cost of Capital (WACC) is the overall cost of capital from all the sources of…

Q: The total book value of WTC's equity is $10 million, and book value per share is $20. The stock has…

A: Market to book ratio = 1.5 Book value of equity = $10 Million --------------------------------------…

Q: You expect that Tin Roof will generate a perpetual stream of EBIT at $92,000 annually. The firm's…

Q: What is the firm's cost of equity?

A: Cost of Equity: It represents the cost of raising capital for the issuer from the equity investors.…

Q: Choose the correct letter of answer: In the current year, Company A had P15 Million in sales, while…

A: Ratio analysis means where different ratio of various years of years companies has been compared and…

Q: The tax rate applicable to Ivan Co. is 20%. The firm pays 5% interest on the P350,000 outstanding…

A: Interest paid = Face value of Loan * Interest rate =350000 * 5% = 17500

Q: An all -equity firm reports a net profit margin of 12% on sales of $6 million. If the tax rate is…

Q: XYZ anticipates eaming $1,800,000 and paying $300,000 in dividends this year. XYZ's capital…

A: Given:Anticipates earnings=$1800000Dividend=$300000Capital structure=20% debt and 80% equityTax…

Q: A firm has a debt-to-equity ratio of 50 percent. Currently, it has interest expense of 500,000 on…

A: Computation of total equity is as follows: Debt to Equity Ratio=50%Debt to Equity Ratio=Total…

Q: BN had 5 degrees of operating leverage when its profit before taxes was P200,000. If the company’s…

A: Degree of operating leverage = % change in operating income% change in sales…

Q: The free cash flow to the firm is reported as $300 million. The interest expense to the firm is $30…

A: Information povided

Q: The tax rate applicable to Blue Co. is 20%. The firm pays 5% interest on the P350,000 outstanding…

Q: NuStuff Inc. has raised $8M by selling bonds at an average rate of 7%. NuStuff’s stockholders expect…

A: WACC- Weighted average cost of capital (WACC) is the rate that a company is expected to pay on…

Q: Kountry Kitchen has a cost of equity of 12.5 percent, a pretax cost of debt of 5.8 percent, and the…

A: Cost of equity, Ke = 125%,Pretax cost of debt, Kd = 5.8%Tax rate, T = 35%WACC = 9.16%Let's assume…

Q: what is the weighted average cost of capital?

A: Information Provided: Cost of equity = 12.8% YTM on bonds = 5.3% Tax rate = 35% Debt-Equity ratio =…

Q: Johnson Tire Distributors has debt with both a face and a market value of $90,000,000. This debt has…

A: given information market value = 90,000,000 EBIT = 50,000,000 tax rate = 25% unleavered cost of…

Q: a firm has a debt-to-equity ratio of 1.0. if we assume that the firm's debt pays 11% interest…

A: Hence, cost of debt after tax is 6.6%.The cost of debt is determined by multiplying cost of debt…

Q: a firm has an asset base with a market value of 5.3 million. ITs debt is worth 2.5 million. if 0.2…

A: Weighted average cost of capital can be used to estimate the rate which should be provided to…

Concept explainers

Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.

Question

Help

Parker Investments has EBIT of $20,000, interest
expense of $3,000, and preferred dividends of $4,000.
If it pays taxes at a rate of 38%, what is Parker's
degree of financial leverage (DFL) at a base level of
EBIT of $20,000?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1 General Introduction

VIEW

Step 2 Solution

VIEW

Step 3 Solution

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Ogier Incorporated currently has $800 million in sales, which are projected to grow by 10% in Year 1 and by 5% in Year 2. Its operating profitability ratio (OP) is 10%, and its capital requirement ratio (CR) is 80%? What are the projected sales in Years 1 and 2? What are the projected amounts of net operating profit after taxes (NOPAT) for Years 1 and 2? What are the projected amounts of total net operating capital (OpCap) for Years 1 and 2? What is the projected FCF for Year 2?
Brower Co. is considering the following alternative financing plans: Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming that income before bond interest and income tax is 2,000,000.
KN Stitches has debt of $26,000, a leveraged value of $78,400, a pretax cost of debt of 7.05 percent, a cost of equity of 15.3 percent, and a tax rate of 21 percent. What is the weighted average cost of capital?
Chamin, Inc. has earnings before interest and taxes (EBIT) of $375,000. Chamin has interest expense of $75,000; it must pay preferred dividends of $6,000 and it has a tax rate of 40 percent. Given a base EBIT level of $375,000, what is the firm's degree of financial leverage? Use the formula that includes the preferred dividends in the calculation.
the winter wear company has expected earnings before interest and taxes of 2,100, and unlevered cost of capital of 14% and a tax rate of 34%. the company also has 2,800 of debt that carries a 7 percent coupon. the debt is selling at par value. what is the value of this firm?
Houston Tools has expected earnings before interest and taxes of $189,400, an unlevered cost of capital of 12.87 percent, and a tax rate of 34 percent. The company has $318,000 of debt that carries a coupon rate of 6.2 percent. The debt is selling at par value. What is the value of this firm?
A firm has total assets of $1,000,000 and a debt ratio of 30 percent. Currently, it has sales of $2,500,000, total fixed costs of $1,000,000, and EBIT of $50,000. If the firm's before-tax cost of debt is 10 percent and the firm's tax rate is 40 percent, what is the firm's ROE?