🏷️ LIMITED TIME OFFER: GET 20% OFF GRADE+ YEARLY SUBSCRIPTION →
Log in
HomeStudy Guides420,000CA160,000

Business Administration - Accounting & Financial Planning FIN401 Study Guide - Midterm Guide: Operating Leverage, Capital Structure

372 views3 pages
greenmuskrat329
3 Jan 2018
School
Seneca College
Department
Business Administration - Accounting & Financial Planning
Course
Business Administration - Accounting & Financial Planning FIN401
Professor
Larry Hurst

For unlimited access to Study Guides, a Grade+ subscription is required.

Document Summary

Dol: a leveraged firm has high fixed costs, a high be point and high, a non-leveraged firm has low fixed costs, a low be point and low, leverage is a double-edged sword. Financial leverage: measure of the amount of debt used by a firm. Financial leverage: degree of financial leverage (dfl) = reflects the capital structure of the firms. Percent change in ebit in ebit (or oi) a larger in eps if dfl > 1 a: dfl measures the sensitivity of a firm"s earnings per share to a in operating income. As a result, the bottom-line earnings per share is negatively affected by interest payments. Doug robinson is considering the possibility of opening his own manufacturing facility. He expects first-year sales to be ,000, and he feels that his variable costs will be approximately 40% of sales. His fixed costs in the first year will be ,000.

Get access

Grade+20% off
$8 USD/m$10 USD/m
Billed $96 USD annually
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
40 Verified Answers

Related Documents

Business Administration - Accounting & Financial Planning FIN401 Lecture Notes - Lecture 16: Operating Leverage, Variable Cost, Capital Structure
greenmuskrat329
Business Administration - Accounting & Financial Planning FIN401 Chapter Notes - Chapter 5: Operating Leverage, Capital Structure, Liquid Oxygen
greenmuskrat329
Business Administration - Accounting & Financial Planning FIN401
Final Exam
Study Guide
Business Administration - Accounting & Financial Planning FIN401 Study Guide - Midterm Guide: Operating Leverage, Capital Structure
greenmuskrat329

Related Questions

McGee Corporation has fixed operating costs of $10 million and a variable cost ratio of 0.65 (Variable cost / Sales). The firm has a $30 million, 10 percent bank loan. McGee’s marginal tax rate is 40 percent. Sales are expected to be $80 million.


a. Compute McGee’s degree of operating leverage at an $80 million sales level. Explain the result.


Sales = ??
VC = Variable Cost = ??
FC = Fixed Cost = ??
EBIT = Sales – VC – FC = ??
DOL = (Sales – VC) / EBIT = ??
Explain ??


b. Compute McGee’s degree of financial leverage at an $80 million sales level. Explain the result.

EBIT = ??
Interest = ??
DFL = EBIT / (EBIT – Interest) = ??
Explain ??

c. Compute MCGree’s degree of combined leverage. Explain the result.

DCL = DOL * DFL = ??

Explain ??

d. If sales decline to $76 million, forecast McGee’s earnings per share.

??

1. A highly automated plant would generally have

all fixed costs

more fixed than variable costs

all variable costs

more variable than fixed costs


2. If the price per unit decreases because of competition but the cost structure remains the same

the breakeven point rises

the degree of combined leverage declines

the degree of financial leverage declines

all of these.


3 If a firm has fixed costs of $31,000, a price of $9.50, and a breakeven point of 15,500 units, the variable cost per unit is:

$8.50

$7.50

$6.00

$9.50

4. Davison Toaster Corp. sells its products for $250 per unit. It has the following costs:

Rent $109,900
Factory labor $29 per unit
Executive salaries $290,000
Raw materials

$6 per unit


The break-even point is

1,210 units

not enough information has been provided to determine the break-even point.

less than 1,710 units

more than 1,210 units

5. A low DOL means:

there is low debt.

there are high overhead costs.

there is a large amount of equity.

there are low fixed costs.

6. Breakeven analysis

is useful to know how much changes in volume affect cost and profit.

short-term profitability.

does not include depreciation expense as a fixed cost when calculating the degree of financial leverage.

all of these.




7. Combined leverage is concerned with the relationship between

changes in EBIT and changes in net income.

changes in volume and changes in EBIT.

changes in volume and changes in EPS.

changes in EBIT and changes in EPS.

Integrativelong dash—Multiple leverage measures  ​ Play-More Toys produces inflatable beach​ balls, selling 400,000 balls per year. Each ball produced has a variable operating cost of $0.89 and sells for $1.23. Fixed operating costs are $26,000. The firm has annual interest charges of $6,400​, preferred dividends of $1,900​, and a 40% tax rate.

a. Calculate the operating breakeven point in units.

b. Use the degree of operating leverage​ (DOL) formula to calculate DOL.

c. Use the degree of financial leverage​ (DFL) formula to calculate DFL.

d. Use the degree of total leverage​ (DTL) formula to calculate DTL. Compare this to the product of DOL and DFL calculated in parts ​(b​) and ​(c​).