Use the following information about Rat Race Home Security, Inc. to answer the q

Question

Use the following information about Rat Race Home Security, Inc. to answer the questions: Average selling price per umit $311. Variable cost per unit $199 Units sold 323 Fixed costs $8,943 Interest expense 13.516 Based on the data above, what will be the resulting percentage change in earnings per share of Rat Race Home Security Inc if they expect operating profit to change 1 percent? You should calculate the degree of financial laverage firsty nite the percentage sig in the ox Round the aswer to two decimals Your Anewer Answer unita

Explanation / Answer

Answer:

Degree of Financial Leverage = EBIT / EBT
EBIT = Sales – Variable Cost – Fixed Cost
EBIT = ($311 * 323) – ($199 * 323) - $8,945
EBIT = $100,453 - $64,277 - $8,945
EBIT = $27,231

EBT = EBIT – Interest Expense
EBT = $27,231 - $13,516
EBT = $13,715

Degree of Financial Leverage = 27,231 / 13,715
Degree of Financial Leverage = 1.99

Change in Earning per share = Degree of Financial Leverage * Change in Operating Profit
Change in Earning per share = 1.99 * 7.1
Change in Earning per share =14.13%

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