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Degree of financial leverage and operating leverage

The Denny Company is planning to expand production because of the increased volume of sales. The current income statement (before expansion) is as follows:
Denny Company Income Statement2006
Sales $4,000,000
Less: Variable costs (40%) $1,200,000
Fixed costs 800,000
Earnings before interest and taxes 2,000,000
Less: Interest expense 400,000
Earnings before taxes 1,600,000
Less: Taxes (@ 35%) 560,000
Earnings after taxes 1,040,000
Shares 100,000
Earnings per share $3.90

Based on the data provided:
a. Calculate the degree of operating leverage using the following formula:
DOL = S-TVC
S-TVC-FC

b.Calculate the degree of financial leverage using the following formula: (5 pts)
DFL = EBIT
EBIT-I

c. Calculate the degree of combined leverage before expansion using the following formula: (5 pts)
DCL = S-TVC
S-TVC-FC-I

Solution Preview

DOL = S-TVC/ ...

Solution Summary

Response provides computatin of degree of financial leverage and operating leverage

$2.19