contestada

Kiwi Airlines has fixed operating costs of $5.8 million, and its variable costs amount to 20 percent of sales revenue. The firm has $2 million in bonds outstanding with a coupon interest rate of 8 percent. Revenues for the firm are $8 million and the firm is in the 40 percent corporate income tax bracket. What is the firm's degree of financial leverage

Respuesta :

anthougo

Kiwi Airlines' degree of financial leverage is 1.36.

Data and Calculations:

Fixed operating costs = $5.8 million

Revenue = $8 million

Variable costs = 20% of sales = $1.6 million ($8 x 20%)

Earnings before interest and taxes = $600,000 ($8 - $5.8 - $1.6 million)

Bonds outstanding = $2 million

Coupon interest rate = 8%

Interest expense = $160,000 ($2,000,000 x 8%)

Earnings before taxes = $440,000 ($600,000 - $160,000)

Corporate income tax = 40%

Income Tax Expense = $176,000 ($440,000 x 40%)

Net Income = $264,000 ($440,000 - $176,000)

Degree of financial leverage = earnings before interest and taxes/earnings before taxes

= $600,000/$440,000

= 1.36

Thus, Kiwi Airlines' degree of financial leverage is 1.36.

Learn more: https://brainly.com/question/23841033