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Calculationg degee of various Leverages

Problem 1

You are supplied with the follwing analytical income statement for the your firm. It reflects last year's operations.

Sales $16,000,000
Variable Costs $8,000,000
Revenue before fixed costs $8,000,000
Fixed Costs $4,000,000
EBIT $4,000,000
Interest Expense $1,500,000
Earning before taxes $2,500,000
Taxes $1,250,000
Net Income $1,250,000

a) At what level of output, what is the degree of operating leverage?
b) What is the degree of financial leverage?
c) What is the degree of combined leverage?
d) If the sales should increase by 20%, by what percent would Earnings before taxes (and net income) increase?
e) What is your firm's break even point in sales dollars?

Problem 2
Discuss the risk return relationship involved in managing firm's working capital.


Solution Preview

Please refer attached document for complete solution. Please done with the help of equation writer may not print here.

Solution 1

Sales = $16000000
Variable Costs=$8000000
Fixed Costs=$4000000
EBIT = $ 4000000
Net Income = $1250000

a) Degree of Operating leverage is given by

DOL of 2.0 means that for 100% change in Sales, EBIT will increase by 200%

b) Degree of Financial leverage is given by

EBIT=Sales-Fixed Costs-Variable ...

Solution Summary

In first problem Degree of operating, financial and combined leverages have been worked out with the help of suitable formulas.

Second problem is small essay type. Risk return relationship involved in managing firm's working capital is explained.