Debbie's Sod Farm (DSF) Financial Analysis

What is the expected EPS for DSF this year?

A. Expected EPS for DSF this year: $_____

What is DSF's Degree of Financial Leverage (DFL)?

B. Degree of financial leverage (DFL): _____

Final Answer:

The expected Earnings Per Share (EPS) for DSF this year is $1.50 and the Degree of Financial Leverage (DFL) is 2.25.

Explanation: To compute the expected EPS (Earnings Per Share) for DSF this year, we first need to find the Net Income. This can be calculated by finding the difference between EBIT (Earnings Before Interest and Taxes) and the interest, and then subtracting the tax on this difference. The tax is found by multiplying the difference by the marginal tax rate.

Net Income = (EBIT - Interest) × (1 - Tax rate)

Plugging in the values:

Net Income = ($2,250 - $1,000) × (1 - 0.40) = $750

Then, to find the earnings per share (EPS), we divide the net income by the number of shares, which is 500 in this case.

EPS = Net Income / Total shares

So, EPS = $750 / 500 = $1.50

Therefore, the expected EPS for DSF this year is $1.50.

To calculate the Degree of Financial Leverage (DFL), the formula used is:

DFL = EBIT / (EBIT - Interest)

Given that EBIT is $2,250 and Interest is $1,000, the calculation is as follows:

DFL = $2,250 / ($2,250 - $1,000) = 2.25

Hence, DSF's Degree of Financial Leverage (DFL) is 2.25.