1. 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.
Required:
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?
2. A company has only common stock outstanding.
Required:
Answer the following multiple-choice question. Total stockholders' equity minus preferred stock equity divided by the number of shares outstanding represents the
1. Return on equity.
2. Stated value per share.
3. Book value per share.
4. Price/earnings ratio.