Kiwi Airlines has fixed operating costs of $5.8 million, and its variable costs amount to 20 percent of sales revenue. The firm has $2 million in bonds outstanding with a coupon interest rate of 8 percent. Revenues for the firm are $8 million and the firm is in the 40 percent corporate income tax bracket. What is the firm's degree of financial leverage

Kiwi Airlines' degree of financial leverage is 1.36.

Data and Calculations:

Fixed operating costs = $5.8 million

Revenue = $8 million

Variable costs = 20% of sales = $1.6 million ($8 x 20%)

Earnings before interest and taxes = $600,000 ($8 - $5.8 - $1.6 million)

Bonds outstanding = $2 million

Coupon interest rate = 8%

Interest expense = $160,000 ($2,000,000 x 8%)

Earnings before taxes = $440,000 ($600,000 - $160,000)

Corporate income tax = 40%

Income Tax Expense = $176,000 ($440,000 x 40%)

Net Income = $264,000 ($440,000 - $176,000)

Degree of financial leverage = earnings before interest and taxes/earnings before taxes

= $600,000/$440,000

= 1.36

Thus, Kiwi Airlines' degree of financial leverage is 1.36.

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