Page 50 - FINAL CFA SLIDES DECEMBER 2018 DAY 11
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Session Unit 11:
37. Measures of Leverage
LOS 37.c: Analyze the effect of financial leverage on a
company’s net income and return on equity., p.70
Example 1: Beta Company financed with 100% equity: Assume that the Beta Company has $500,000 in assets
that are financed with 100% equity. Fixed costs are $120,000. Beta is expected to sell 100,000 units, resulting in
operating income of [100,000 ($4 – $2)] – $120,000 = $80,000. Beta’s tax rate is 40%. Calculate Beta’s net income
and return on equity if its EBIT increases or decreases by 10%.
tanties
