I need the solution to the below mini case from Foundations in Finance 7th ed. B
ID: 2649045 • Letter: I
Question
I need the solution to the below mini case from Foundations in Finance 7th ed. By Keown, Martin and Petty pg 369-370.
MINI CASE DATA #1 #2 Output level 80,000 120,000 Operating assets 4,000,000 6,000,000 Operating asset turnover 8 12 Return on operating assets 32% 48% Degree of operating leverage 6 10 Interest expense 600,000 720,000 Tax rate 35% 42% BREAK-EVEN Step 1: Operating profit margin Step 2: Sales Step 3: EBIT Step 4: Revenue before FC Step 5: Total VC Step 6: Total FC Step 7: Selling price per unit VC per unit Step 8: Break-even point Sales (VC) Revenue before FC (FC) EBIT (Interest exp.) Earnings before taxes (Taxes @ .35) Net income A) DFLebit= B) DCLs= C) S*= D) increase in sales= 30% 40% %increase in EBT= E) Sales (VC) Revenue before FC (FC) EBIT (Interest exp.) Earnings before taxes (Taxes @ .35) Net incomeExplanation / Answer
DATA #1 #2 Output level A 80000 120000 Operating assets B 4000000 6000000 Operating asset turnover C 8 12 Return on operating assets D 32% 48% Degree of operating leverage E 6 10 Interest expense F 600000 720000 Tax rate G 35% 42% BREAK-EVEN Step 1: Operating profit margin H = [B*D] 1,280,000.00 2,880,000.00 Step 2: Sales I = [ B*C] 32,000,000.00 72,000,000.00 Step 3: EBIT J = [H/(1-G) + F] 2,569,230.77 5,685,517.24 Step 4: Revenue before FC K = [J*E] 15,415,384.62 56,855,172.41 Step 5: Total VC L = [I-K] 16,584,615.38 15,144,827.59 Step 6: Total FC M = [ K-J] 12,846,153.85 51,169,655.17 Step 7: Selling price per unit N = [ I/A] 400.00 600.00 VC per unit O = [ L/A] 207.31 126.21 Step 8: Break-even point P = [M/(N-O)] 66,666.67 108,000.00 Sales 32,000,000.00 72,000,000.00 (VC) 16,584,615.38 15,144,827.59 Revenue before FC 15,415,384.62 56,855,172.41 (FC) 12,846,153.85 51,169,655.17 EBIT 2,569,230.77 5,685,517.24 (Interest exp.) 600000 720000 Earnings before taxes 1,969,230.77 4,965,517.24 (Taxes ) 689,230.77 2,085,517.24 Net income 1,280,000.00 2,880,000.00 A] DFL 1.30 1.15 DFL = EBIT/EBT B] DCL 7.83 11.45 DCL = Revenue before FC/EBT C] S* D] Increase in Sales % 30% 40% Increase in EBT % = Increase in Sale %* DCL 234.84% 458.00% E] Sales 41,600,000.00 100,800,000.00 (VC) 21,560,000.00 21,202,758.62 Revenue before FC 20,040,000.00 79,597,241.38 (FC) 12,846,153.85 51,169,655.17 EBIT 7,193,846.15 28,427,586.21 (Interest exp.) 600000 720000 Earnings before taxes 6,593,846.15 27,707,586.21 (Taxes ) 2,307,846.15 11,637,186.21 Net income 4,286,000.00 16,070,400.00
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