LaGuerre Computer Animation Ltd

question 6

Multiple Choice

LaGuerre Computer Animation Ltd. has a tax rate of 30%, has been trading around $44.50 for three years and has a consistent dividend payout of 35%. Last year, it had common shares outstanding of 4.2 million, no preferred shares, interest payments of $8 million and an EBIT of $29 million. Over the following year, the company repurchased 1.2 million shares with a bond issue that increased its interest payments by $2.7 million. If its EBIT rose to $32 million, what is the degree of financial leverage for LaGuerre?

• A) Insignificant at (0.36)
• B) Insignificant at .27
• C) Low at 3.2
• D) High at .25
• E) High at 4.06.

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Definitions:

Break-Even Point

The financial point at which total revenues equal total expenses, resulting in no profit or loss.