CFA Practice Question

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CFA Practice Question

A firm has EBIT of $20 million, interest expense of $8 million, and faces a tax rate of 40 percent. There are 15 million shares outstanding. The increase in EPS resulting from a 10% increase in EBIT would be closest to a ______ increase.

A. 10%
B. 14%
C. 17%
Correct Answer: C

The EPS is currently [($20 - $8) x (1 - .4)]/15 = $0.48 per share. If EBIT increased to $22 million, the EPS would be [($22 - $8) x (1 - .4)]/15 = $0.56 per share. The change in EPS would be a 17% increase.

User Contributed Comments 11

User Comment
rockeR How about this method?
EBIT/(EBIT-I)=(%change in EPS)/(%change in EBIT)
So, 20/(20-8)=X/10%

Hence, X=%change in EPS=0.166x=17% increase
xiong It is a good idea to use DFL
katybo is the best way...
MaiHuong Another method
DFL = EBIT/(EBIT-Interest) = 20/12 = 1.667
DFL = %change of net income/%change of operating income
EBIT increase 10% --> net income increase 1.667*0.1 = 16.7%
nuber of stock remain --> EPS increase 16.7%
auhjpps yeah the method used by maihoung is the better one
2014 good solution maihuong
johntan1979 Yeah, I used the DFL method too. So much faster.
jonan203 i love how they give us the DFL formula and use a method that takes ten times longer to get the same answer
leon121 good job maihuong
cfastudypl Both rockeR and MaiHuong methods are one and the same and is the same method I used. AN method for this question is long and will waste your time in the exam. In any case, use the method you understand best.
walterli easy one? 20*10%/?20-8?=16.67%
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