CMA Study Group

Hello Mr. Ahmed,

I think you misinterpreted the formula. Apparently, tax is not included in the computation.
EBIT = Earnings BEFORE DEDUCTING interest and taxes
EBT =  Earnings BEFORE DEDUCTING taxes

DFL = EBIT / EBT

Thus, tax is not deducted from the earnings in computing DFL.

Trust this guides.

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Kenneth
Accountant
Dubai
United Arab Emirates
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Original Message:
Sent: 05-18-2014 03:55 AM
From: Ahmed Mohamed Abdou Ahmed
Subject: DFL

Question 20:

2B2-CQ05

Pearl Manufacturing Company has sales of $1,000,000, variable costs of $500,000, and fixed costs of $250,000. In addition, Pearl has interest payments of $50,000, preferred stock dividends of $60,000, and faces an effective tax rate of 40%. What is the Degree of Financial Leverage (DFL)?

	1.25.
	2.5.
	1.5.
	1.35.

The Degree of Financial Leverage is computed as follows: DFL = EBIT/EBT. Placing the numbers into the formula, DFL = $(1,000,000 − $500,000 − $250,000) / $(1,000.000 − $500,000 − $250,000 − $50,000), which equals 1.25. A DFL of 1.25 implies that every 1% of increase in operating income will result in a 1.25% increase in Earnings Per Share.

The Degree of Financial Leverage is computed as follows: DFL = EBIT/EBT. Placing the numbers into the formula, DFL = $(1,000,000 − $500,000 − $250,000) / $(1,000.000 − $500,000 − $250,000 − $50,000), which equals 1.25. A DFL of 1.25 implies that every 1% of increase in operating income will result in a 1.25% increase in Earnings Per Share.

IN THE FORMULA TAX RATE IS CALCULATED WHY HERE ITS NOT USED TO CALCULATE THE DFL
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Ahmad M. Abdou
Sr. Accountant
Kuwait
+965 96663679
ahmadabdo83@...
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Dear Ahmad,

the correct answer is 2.5.

in the calculation you should take into consideration the Preferred dividends and in the denominator and should be divided by 1-tax.

DFL= EBIT/ EBIT- interest - Preferred Dividend (1 - tax)


regards,

-------------------------------------------
Mohammad Hourani
Controller
Salheye
Lebanon
-------------------------------------------






Original Message:
Sent: 05-18-2014 03:55 AM
From: Ahmed Mohamed Abdou Ahmed
Subject: DFL

Question 20:

2B2-CQ05

Pearl Manufacturing Company has sales of $1,000,000, variable costs of $500,000, and fixed costs of $250,000. In addition, Pearl has interest payments of $50,000, preferred stock dividends of $60,000, and faces an effective tax rate of 40%. What is the Degree of Financial Leverage (DFL)?

	1.25.
	2.5.
	1.5.
	1.35.

The Degree of Financial Leverage is computed as follows: DFL = EBIT/EBT. Placing the numbers into the formula, DFL = $(1,000,000 − $500,000 − $250,000) / $(1,000.000 − $500,000 − $250,000 − $50,000), which equals 1.25. A DFL of 1.25 implies that every 1% of increase in operating income will result in a 1.25% increase in Earnings Per Share.

The Degree of Financial Leverage is computed as follows: DFL = EBIT/EBT. Placing the numbers into the formula, DFL = $(1,000,000 − $500,000 − $250,000) / $(1,000.000 − $500,000 − $250,000 − $50,000), which equals 1.25. A DFL of 1.25 implies that every 1% of increase in operating income will result in a 1.25% increase in Earnings Per Share.

IN THE FORMULA TAX RATE IS CALCULATED WHY HERE ITS NOT USED TO CALCULATE THE DFL
-------------------------------------------
Ahmad M. Abdou
Sr. Accountant
Kuwait
+965 96663679
ahmadabdo83@...
-------------------------------------------

Dear Mohammed Hourani,
There is no Tax deduction as well as prefered dividends. they were provided to confuse us.

DFL = Earnings before Interest and tax / Earnings Before Tax
 = $250k / $200k = 1.25

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Ganesan Sivalingam
Accountant
Sharqiyah Desalination Co SAOG
Muscat
Oman
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Original Message:
Sent: 06-01-2014 02:20 PM
From: Mohammad Hourani
Subject: DFL

Dear Ahmad,

the correct answer is 2.5.

in the calculation you should take into consideration the Preferred dividends and in the denominator and should be divided by 1-tax.

DFL= EBIT/ EBIT- interest - Preferred Dividend (1 - tax)


regards,

-------------------------------------------
Mohammad Hourani
Controller
Salheye
Lebanon
-------------------------------------------






Original Message:
Sent: 05-18-2014 03:55 AM
From: Ahmed Mohamed Abdou Ahmed
Subject: DFL

Question 20:

2B2-CQ05

Pearl Manufacturing Company has sales of $1,000,000, variable costs of $500,000, and fixed costs of $250,000. In addition, Pearl has interest payments of $50,000, preferred stock dividends of $60,000, and faces an effective tax rate of 40%. What is the Degree of Financial Leverage (DFL)?

	1.25.
	2.5.
	1.5.
	1.35.

The Degree of Financial Leverage is computed as follows: DFL = EBIT/EBT. Placing the numbers into the formula, DFL = $(1,000,000 − $500,000 − $250,000) / $(1,000.000 − $500,000 − $250,000 − $50,000), which equals 1.25. A DFL of 1.25 implies that every 1% of increase in operating income will result in a 1.25% increase in Earnings Per Share.

The Degree of Financial Leverage is computed as follows: DFL = EBIT/EBT. Placing the numbers into the formula, DFL = $(1,000,000 − $500,000 − $250,000) / $(1,000.000 − $500,000 − $250,000 − $50,000), which equals 1.25. A DFL of 1.25 implies that every 1% of increase in operating income will result in a 1.25% increase in Earnings Per Share.

IN THE FORMULA TAX RATE IS CALCULATED WHY HERE ITS NOT USED TO CALCULATE THE DFL
-------------------------------------------
Ahmad M. Abdou
Sr. Accountant
Kuwait
+965 96663679
ahmadabdo83@...
-------------------------------------------