1) A firm needed $500,000 total resources to operate a project that would yield them a profit. It has drafted two (2) alternatives in order to procure this amount. First alternative - invest $40,000 among the five owners for a total equity of $200,000, and loan from a bank the remaining $300,000 with a 10% interest annually of $30,000. Second alternative - invest $40,000 among the five owners and invite five more investors to contribute $40,000 each for a total capital of $400,000, and loan the remaining $100,000 from the bank and pay 10% or $10,000 annual interest. 

Determine the Degree of Financial leverage (DFL) of each alternatives assuming an Earnings before interest and tax (EBIT) of $120,000?

 

 

 

Answer rating: 100% (QA)

Answer The Degree of Financial Leverage DFL measures the percentage change in earnings per sh... View the full answer