WACC, EBIT, EPS

Question 1

EBIT- EPS analysis examines

Answer 1

The effect of financial leverage on the EPS with varying levels of EBIT or under alternative financial plans. It examines the effect of financial leverage on the behavior of EPS under different financing alternatives and with varying levels of EBIT.

Question 2

EPS Formula

Answer 2

EPS = (EBIT - Debt Interest) x (1 - Tax Rate) - Preferred Share Dividends ÷ Number of Common Shares Outstanding

Question 3

EPS Explanation

Answer 3

One of the primary valuation metrics used by investors to assess a business’ worth and financial stability is earnings per share (EPS). EPS reflects a company’s net income divided by the number of common shares outstanding. EPS, of course, largely depends on a company’s earnings.

Question 4

EBIT-EPS analysis is used for

Answer 4

Making the choice of the combination and of the various sources. It helps select the alternative that yields the highest EPS

Question 5

EBIT =

According to EPS

Answer 5

(EPS x Number of Common Shares Outstanding) + Preferred Share Dividends ÷ (1 - Tax Rate) + Debt Interest

Question 6

Gross Margin

Answer 6

Gross margin is net sales less the cost of goods sold (COGS). In other words, it’s the amount of money a company retains after incurring the direct costs associated with producing the goods it sells and the services it provides.

Question 7

Operating leverage

Answer 7

Is a cost-accounting formula that measures the degree to which a firm or project can increase operating income by increasing revenue. A business that generates sales with a high gross margin and low variable costs has high operating leverage

Question 8

Operating leverage 2

Answer 8

Operating leverage is used to calculate a company’s break-even point and help set appropriate selling prices to cover all costs and generate a profit.

Companies with high operating leverage must cover a larger amount of fixed costs each month regardless of whether they sell any units of product.

Low-operating-leverage companies may have high costs that vary directly with their sales but have lower fixed costs to cover each month.

Question 9

Contribution Margin (CM)

Answer 9

Price - Variable cost per unit

Question 10

Degree of operation leverage

Answer 10

Q * CM /Q * CM - Fixed operating costs

Question 11

Gearing

Answer 11

D / E

Question 12

WACC

Answer 12

The WACC is the simple weighted average of the cost of equity and the cost of debt. Given the premise that wealth is the present value of future cash flows discounted at the investors’ required return, the market value of a company is equal to the present value of its future cash flows discounted by its WACC.

Question 13

Degree of financial leverage

Answer 13

DFL is also called earnings per share (EPS) sensitivity to operating income fluctuations. This means that the higher the financial leverage, the greater the volatility of dividends.

Question 14

Leverage

Answer 14

Use of fixed cost to magnify the potential return to a firm

Question 15

2 types of Fix cost

Answer 15

Fix operating cost = salaries, rent

Fix financial cost = interest cost of debt

Question 16

Leverage cause

Answer 16

Growth percentage in return take place more than growth percentage in the sale

Question 17

Leverage

Answer 17

Magnifies the return to common stockholders but also magnifies the risk

Question 18

how the risk can control with the use of leverage?

Answer 18

through fix cost

Question 19

The degree in the use of leverage depends on

Answer 19

Management attitudes toward risk

Nature of the business

Question 20

Financial leverage shows

Answer 20

Shows the relationships between the sales and EPS (Through EBIT)

Question 21

Operating leverage shows

Answer 21

Shows the relationships between sales and EBIT

Question 22

Operating leverage shows process components

Answer 22

Sales - TVC = CONTRIBUTION MARGIN
CM - FC = EBIT
(Ending point is EBIT)
(Fix operating costs exist in this part)

Question 23

Financial leverage shows process components

Answer 23

EBIT - Interest = EBT (Earn before tax)
EBIT - Tax = EAT (Earn after tax)
EAT / Number of outstanding share = EPS
(Fix financial cost is here)

Question 24

Earnings consequent

Answer 24

EBIT, EBT, EAT, EPS

Question 25

When a firm use more fixed operating cost if sale change the firm will experience

Answer 25

More variable operating income

Question 26

What the Degree of operation leverage says?

Answer 26

it says by use of fixed operating cost small change in sale revenue magnified into a larger change in OI

Question 27

Operation leverage formula

Answer 27

1. change in EBIT/EBIT // change in sales / sales
   or
2. %change in EBIT / % change in sales
3. Sales - VC / EBIT

Question 28

EBIT or

Answer 28

OI operation income

Question 29

Financial leverage

Answer 29

The use of fixed financial costs (Debt, preferred stock) rather than variable financial cost (Common stock)

Question 30

Financial risk

Answer 30

The variability or uncertainty of the firm earning per share (EPS)
And
Increase the probability of insolvency when a firm uses the financial leverage

Question 31

Financial leverage formula

Answer 31

1. %EPS / % EBIT
2. change in EPS / EPS // Change in EBIT / EBIT
3. EBIT / EBIT - I

Question 32

If we don’t have a debt

Answer 32

there is no financial leverage