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Vapor Lock Motors’ EBIT is $7,000,000, the company’s interest expense is $2,000,000, and its tax rate is 40 percent. Vapor Lock’s beta is 1.5. a. What is Vapor Lock’s DFL? b. If Vapor Lock were able to grow its EBIT by 50%, what would be the percentage increase in net income? c. If Vapor Lock were able to grow its EBIT by 50%, what would be the resulting net income

Vapor Lock Motors’ EBIT is $7,000,000, the company’s interest expense is $2,000,000, and its tax rate is 40 percent. Vapor Lock’s beta is 1.5. a. What is Vapor Lock’s DFL? b. If Vapor Lock were able to grow its EBIT by 50%, what would be the percentage increase in net income? c. If Vapor Lock were able to grow its EBIT by 50%, what would be the resulting net income

Principles of Cost Accounting
Principles of Cost Accounting
17th Edition
ISBN:9781305087408
Author:Edward J. Vanderbeck, Maria R. Mitchell
Publisher:Edward J. Vanderbeck, Maria R. Mitchell
Chapter10: Cost Analysis For Management Decision Making
Section: Chapter Questions
Problem 13E
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Vapor Lock Motors’ EBIT is $7,000,000, the company’s interest expense is $2,000,000,
and its tax rate is 40 percent. Vapor Lock’s beta is 1.5.
a. What is Vapor Lock’s DFL?
b. If Vapor Lock were able to grow its EBIT by 50%, what would be the percentage
increase in net income?
c. If Vapor Lock were able to grow its EBIT by 50%, what would be the resulting
net income?

Expert Solution
Step 1: INTRODUCTION

DFL means how much the earnings of a firm change due to change in the debt-equity ratio of the firm. Change in debt-equity ratio means change in capital structure of the firm. It also leads to change in interest component which a firm which a firm is required to pay.

 

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