fina chapter 11 modules

The degree of operating leverage has which of the following characteristics?

The DOL relates the change in sales to the change in net operating income.

Which of the following statements is correct?

The degree of operating leverage (DOL) depends on a company's fixed costs, variable costs, and sales. The DOL formula assumes (1) that fixed costs are constant and (2) that variable costs are a constant proportion of sales.

______results from the use of fixed - cost assets or funds to magnify returns to a firm's owners.

Leverage

A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 0.42% of sales, while fixed cost will be $450,000. The first year's sales estimates are $1,125,231. Calculate the firm's operating breakeven level of sales.

break-even= fc/cm ratio =450,000/(1-0.42%) =451,897.97

Generally, increases in leverage result in________ return and ___________ risk.

increased; increased

In theory, a firm should maintain financial leverage consistent with a capital structure that_______

maximizes the owner's wealth

Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $500,000 and its variable costs equal 60% of sales, so the company's current operating income is $700,000. The company's interest expense is $523,647. What is the company's degree of financial leverage (DFL)?

oi/oi-interest exp. 700,000/(700,000-523647) =*3.97*

A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 40% of sales, while fixed cost will be $441,391. The first year's sales estimates are $1,250,000. Calculate the firm's degree of operating leverage (DOL).

sales-variable cost[40%*sales] =contribution margin-fixed cost= operating income DOL= cm/oi 1250000-500000= *750000*-441391= *308609* 750000/308609= *2.43*

Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $529,435 and its variable costs equal 60% of sales. The company's interest expense is $500,000. What is the company's degree of total leverage (DTL)?

sales-variable[sales*.60] =operating income-IE= EBT cm= 3000000(1-60%) 3000000-1800000=*670565*-500000=*170565* (DTL)=(DOL)*(DFL) DOL=CM/OI 1200000/670565= *1.79* DFL=OI/EBT 670565/170565= *3.93* DTL=1.79*3.93 =7.03