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# Degree of financial leverage and operating leverage

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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