2) D&G Textile company is evaluating two different operating structures. Data about those structures are shown below. Annual interest expense of the firm is $200, it has common shares outstanding of 2,000, and a tax rate of 20 percent. Fixed Price Variable Cost _per Unit $1 $1 per Unit $0.75 Costs operating structure 1: operating structure 2: $500 $1,200 $0.70 (a) For each operating structure, calculate (a1)EBIT and EPS at 5,000 and 10,000 units (a2)the degree of operating leverage (DOL) and degree of total leverage (DTL) using 10,000 units as a base sales level. (a3)the operating breakeven point in units. (b) Which operating structure has greater operating leverage and business risk? (c) If D&G projects sales of 10,000 units, which operating structure is recommended?
2) D&G Textile company is evaluating two different operating structures. Data about those structures are shown below. Annual interest expense of the firm is $200, it has common shares outstanding of 2,000, and a tax rate of 20 percent. Fixed Price Variable Cost _per Unit $1 $1 per Unit $0.75 Costs operating structure 1: operating structure 2: $500 $1,200 $0.70 (a) For each operating structure, calculate (a1)EBIT and EPS at 5,000 and 10,000 units (a2)the degree of operating leverage (DOL) and degree of total leverage (DTL) using 10,000 units as a base sales level. (a3)the operating breakeven point in units. (b) Which operating structure has greater operating leverage and business risk? (c) If D&G projects sales of 10,000 units, which operating structure is recommended?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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D&G Textile company is evaluating two different operating structures. Data about those structures are shown below. Annual interest expense of the firm is $200, it has common shares outstanding of 2,000, and a tax rate of 20 percent.
Transcribed Image Text:2) D&G Textile company is evaluating two different operating structures. Data about
those structures are shown below. Annual interest expense of the firm is $200, it has
common shares outstanding of 2,000, and a tax rate of 20 percent.
Fixed
Price
Variable Cost
_per Unit
$1
$1
per Unit
$0.75
Costs
operating structure 1:
operating structure 2:
$500
$1,200
$0.70
(a) For each operating structure, calculate
(a1)EBIT and EPS at 5,000 and 10,000 units
(a2)the degree of operating leverage (DOL) and degree of total leverage (DTL)
using 10,000 units as a base sales level.
(a3)the operating breakeven point in units.
(b) Which operating structure has greater operating leverage and business risk?
(c) If D&G projects sales of 10,000 units, which operating structure is recommended?
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