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NEW QUESTION: 1
Assume that a firm currently has EBIT of $2,000,000, a degree of total leverage of 7.5, and a degree of financial leverage of 1.875. If sales decline by 20 percent next year, then what will be the firm's expected EBIT in one year?
DOL = DTL/DFL = 7.5/1.875 = 4.0.
Change EBIT = (-0.20)(4.0)($2,000,000) = -$1,600,000.
EBIT = $2,000,000 - $1,600,000 = $400,000.
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