Illinois Tool Company's (ITC) Fixed Operating Costs Are $1,260,000, and Its

question 26

Multiple Choice

Illinois Tool Company's (ITC) fixed operating costs are $1,260,000, and its variable cost ratio (i.e., variable costs as a fraction of sales) is 0.70. The firm has $3,000,000 in bonds outstanding at an interest rate of 8%. ITC has 30,000 shares of $5 preferred stock and 150,000 shares of common stock outstanding. ITC is in the 50% corporate income tax bracket. Forecasted sales for next year are $9 million. What is ITC's degree of financial leverage at an EBIT level of $1,440,000?

• A) 1.20
• B) 1.875
• C) 3.0
• D) 1.60

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Definitions:

Return on Investment

A performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of several different investments.

Variable Costs

Variable costs are expenses that change in proportion to the activity of a business, such as sales volumes.

Controllable Fixed Costs

Expenses that do not change with production level but can be altered or managed by decisions at the management level.

Average Operating Assets

The average value of the assets that are used in the day-to-day operations of a business, calculated over a specific period.