I though we have to consider amortizaion of discount or permium when calculating the interest expense.
It’s not just same as coupon payments.
In below example current yield is 8% and coupon payments are 7% so i assume its issued at discount.
Now can I just go ahead and use 7% coupon payment in calculating interest expense for DFL or DTL calculation?
Thanks in advance.
The following information reflects the projected operating results for Opstalan, a catalog printer.
- Sales of $5.0 million.
- Variable Costs at 40% of sales.
- Fixed Costs of $1.0 million.
- Debt interest payments on $1.5 million issued with an annual 7.0% coupon (current yield is 8.0%).
- Tax Rate of 0.0%.
Opstalan’s degree of total leverage (DTL) is closest to:
A. 2.58. B. 1.41. C. 1.59.
First, calculate the operating results:
Opstalan Annual Operating Results
Sales
$5,000,000
Variable Costs
2,000,000
3,000,000
Fixed Costs
1,000,000
EBIT
2,000,000
Interest Expense
105,000
1,895,000
Variable costs = 0.40 × 5,000,000 Interest Expense = 0.07 × 1,500,000
Second, calculate DOL = (Sales − Variable Costs) / (Sales − Variable Costs − Fixed Costs) = 3,000,000 / 2,000,000 = 1.50
Third, calculate DFL = EBIT / (EBIT − I) = 2,000,000 / 1,895,000 = 1.06.
Finally, calculate DTL = DOL × DFL = 1.50 × 1.06 = 1.59.
Answer: C