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

question 41

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's debt consists of a $6,000,000 bond issue (par value) which pays a coupon rate of 9%. Sales are $9 million per year. What is ITC's degree of financial leverage?

• A)1.20
• B)1.875
• C)3.0
• D)1.60

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Definitions:

Retained Earnings

The portion of a business's profits not distributed to shareholders but reinvested in the business or held for future use.

Surplus Cash

Excess funds that a company retains over its necessary working capital and capital expenditure requirements, often available for investment or distribution.

Dividends

A portion of a company's earnings distributed to shareholders, often in the form of cash or additional stock.

Internal Revenue Code

The comprehensive set of tax laws in the United States, governed by the Internal Revenue Service (IRS), that dictates federal tax obligations.