Use the following information for questions 7-9: A company is trying to decide o
ID: 2683508 • Letter: U
Question
Use the following information for questions 7-9: A company is trying to decide on their use of operating and financial leverage from among four choices. Their Interest Expense is the Interest Rate times Debt. Their Tax Rate is 40% Option Fixed Costs Variable Costs Debt Interest Rate 1. 20000 70% of Sales 0 0% 2. 50000 40% of Sales 0 0% 3. 20000 70% of Sales 500,000 10% 4. 50000 40% of Sales 500,000 10% 7. What is their Degree of Operating Leverage under option 1 if sales are $200,000? a) 1 b) 1.5 c) 2 d) 3 8. What is their Degree of Financial Leverage under option 4 if EBIT is $120,000? a) 1 b) 1.2 c) 1.7 d) 2.2 9. If Sales rise by 10% from 300,000 to 330,000 under option 3, then EBT will increase by what percent? a) 13% b) 25% c) 35% d) 45%Explanation / Answer
degree of operating leverage under option 1 if sales =$200,000
ebit=200000-20000-.7*200000=$40,000
therefore degree of operating leverage (DOL) = (EBIT+F)/EBIT ...where F=fixed cost
= (40,000+20,000)/40000 = 1.5
hence ans - (b)1.5
if ebit = $120,000
dgree of financial leverage = ebit/(ebit-int)
= 120000/(120000-10%of500000)
= 1.71 option(c)
if sales rises by 10% and becomes 330000,option 3
initially sales=$300000, fixed cost = $20,000, v.c = 70% of sales = $210,000
therefore ebit = 300000-20000-210000= $70,000
ebt=ebit-int = 70,000 - 10% of 500000
= $20,000
final sale s= $330,000
ebit=330000-20000-.70*330000 = $$79,000
ebt=70,000-50,000=$29,000
ebt has increased by = (29000-20000)/20000
= 45% (d)option
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.