Interest expense calculating when DFL or DTL

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