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    Corporate Finance - Calculating Leverage

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    Assume that a firm has the following Income Statement.
    Use this data to determine the business risk and the financial risk as measured by the degree of operating leverage and the degree of financial leverage, respectively. Also, determine the combined leverage as found with the degree of combined leverage. Utilize these risk measures to see the affect of a change in sales.

    Income Statement

    December 31, Year 1
    Sales ($34/unit)

    $34,000,000
    Variable Cost ($20/unit)

    $20,000,000
    Fixed Cost

    $10,000,000
    EBIT

    $4,000,000
    Interest Expense

    $120,000
    EBT

    $3,880,000
    Taxes (40%)

    $1,552,000

    Net Income

    $2,328,000
    Calculate the DOL.
    Calculate the DFL.
    Determine the DCL
    If sales increased by 20% determine the change in EBIT and the change in EPS.
    Please submit your backup in Excel showing how answers were reached. Thank you.

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    Solution Preview

    Corporate Finance Calculating Leverage
    Assume that a firm has the following Income Statement Use this data to determine the business risk and the financial risk as measured by the degree of operating leverage and the degree of financial ...

    $2.19