Chapter 13, Fin final

what is the alternative way to calculate the degree of combined leverage

(sales- VC) __________________ (sales- VC-FC- Interest ex)

what is the alternative way to calculate the degree of operating leverage

(sales- VC)/ (sales - VC-FC) where VC= variable costs FC= fixed costs

step by step process for break even analysis

1) you want to find where Earning before income tax are at 0 2)calculate the break even quantity> 3) calculate total revenue for different levels of sales

Degree of operating leverage can best be defined as:

DOL = % change EBIT % change in Sales

total costs at any level of unit production and sales can be found using

TC= FC + (vc X Q) q= units produced

the larger amount of fixed costs does what to the DOL

greater leveraging effect

Whenever fixed costs are greater than zero, DOL is:

greater than 1

Firms with relatively low fixed operating costs and high variable operating costs can best be described as:

having a low degree of operating leverage

what are the different types of leverage

operating financial combined

degree of combined leverage calculation

percentage change in ent income divided by the percentage change in sales

what is the degree of financial leverage

percentage change in net income divided by the percentage change in EBIT

how to calculate the DFL

percentage change in net income/ percentage change in earnings EBIT

If variable costs = $10.00 per unit; and the selling price = $13.00 per unit, and the break-even point in units = 100,000, calculate the fixed costs.

$300,000

why does it matter what equation to use for DOL

% change > shows the effect of leverage, by a sales change by certain percentage, shows greater change if more than 1 alternative: shows fixed cost cassette leveraging effect, when they are greater than 0, DOL is greater than one

how to calculate the degree of operating leverage laid out

1)find the operating income before interest or taxes of each period by subtracting the expenses by the sales 2) then to find percentage change in sales do (period 2-period 1) / period 1 3) do that for sales and operating income 4) then divide the percentage operating income by the percentages sales change percentage

Total variable costs are $15,000, sales $50,000, and fixed costs $15,000; calculate DOL.

1.75

If sales in 2018 were $100,000 and in 2019 sales were $125,000; If operating income in 2018 were $50,000 and in 2019 were $75,000; If net income in 2018 were $10,000 and in 2019 were projected to be $15,000; Calculate DOL using 2018 as your base:

2

Given fixed costs of $200,000, variable costs of $6.00 per unit, and a sales price per unit of $7.00, calculate the break-even point in units.

200,000

Given fixed costs of $100,000, variable costs of $7.00 per unit, and a sales price per unit of $10.00, calculate the break-even point in units.

33,333

how to calculate the percentage change in net income

= percentage change in earnings before interest and taxes X degree of financial leverage

what is another way to calculate the DFL?

EBIT/( EBIT- interest expense) ** Earnings before taxes and interest**

what is the calculation for the breakeven point

FC/ p-VC FC= total fixed costs p= sales price per unit VC= variable cost

how to find the unit of sales that causes the breakeven point?

FC/ p-VC p > sales price per unit

How to graphically analysis of break even point

For the graph: - create variable cost line> variable cost per unit , fixed cost horizontal, and total costs and total revenue line( slope is price per unit) then go to the quantity produced needed and go up to get the total costs and even lines will show the variable and the total costs of the project

capital structure theory

benefit fo debt financing is that interest is tax deductible tot the paying firm where payment to equity providers are not - firms must trade off this benefit against the increased financial risk associated with higher debt levels

what are some common variable costs

commission materials albor

Debt financing does what

creates leverage, allows for a company to have a magnifying effect on movements of operating or net income - results from fixed operating or financial costs!

DOL means

degree of operating leverage

EBIT means

earnings before interest and taxes

anytime you see fixed interest expense it means?

expect the presence of financial leverage

what happens with operating leverage when unit sales increase

firms with fixed production process costs will see EBIT rise by larger percentage than sales opposite: if they drop

what are some common fixed costs

salaries(sometimes) depreciation rent

how to calculate total revenue

sales price X units sold

Firms with high fixed operating costs:

tend to have low variable costs

when a DOL is greater than one it shows what

that a firm has operating leverage - when sales change by some percentage EBIT will change by a greater percentage

The sales break-even point is defined as:

the level of sales that a firm must reach to cover total operating costs

sales breakeven point in the breakeven analysis is what

the level of sales that must be achieved such that operating income equals zero

capital structure is

the mixture of funding sources (debt, preferred stock, common stock) that firm uses to finance their assets

What is the degree of operating leverage

the percentage change in earning before interstate's and taxes, decided by the percentage change in sales

important notes about modigliani and miller

they wrote a paper which proved that with certain assumptions there is no optimal capital structure - with assumptions that no trans cost, no tax, everyone has same info, debt is diskless, debt does not affect operations indicated capital structure is 100% debt optimal

what is the point of the breakeven analysis

to understand the operating leverage

How does debt affect the weighted average cost of capital

use fo debt will initially lower the WACC - at high debt levels, WACC increases as investors perceive risk of firm to be substantial

financial leverage

where a change in operating income causes net income to change by a larger percentage because o the presence of fixed financial costs

Combined leverage

where a change in sales causes net income to change by a larger percentage because of fixed operating and financial costs mixture of having fixed operating and financial costs, if FC & Int ex were zero than no leverage

operating leverage

where a small change in sales triggers a large change in operating income( income before taxes and interest)