4: TOR most recently sold 100,000 units at $7.50 each; its variable operating costs are $3.00 per unit, and its fixed operating costs are $250,000. Annual interest charges total $80,000, and the firm has 8,000 shares of $5 (annual dividend) preferred stock outstanding. It currently has 20,000 shares of common stock outstanding. Assume that the firm is subject to a 40% tax rate. a. At what level of sales (in units) would the firm break even on operations (that is, EBIT $0)? b. Calculate the firm's earnings per share (EPS) in tabular form at (1) the current level of sales and (2) a 120,000-unit sales level. c. Using the current $750,000 level of sales as a base, calculate the firm's degree

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Chapter1: Financial Statements And Business Decisions
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Problem 4: TOR most recently sold 100,000 units at $7.50 each; its variable operating costs are
$3.00 per unit, and its fixed operating costs are $250,000. Annual interest charges
total $80,000, and the firm has 8,000 shares of $5 (annual dividend) preferred stock
outstanding. It currently has 20,000 shares of common stock outstanding. Assume
that the firm is subject to a 40% tax rate.
a. At what level of sales (in units) would the firm break even on operations (that
is, EBIT $0)?
b. Calculate the firm's earnings per share (EPS) in tabular form at (1) the current
level of sales and (2) a 120,000-unit sales level.
c. Using the current $750,000 level of sales as a base, calculate the firm's degree
of operating leverage (DOL).
d. Using the EBIT associated with the $750,000 level of sales as a base,
calculate the firm's degree of financial leverage (DFL).
e. Use the degree of total leverage (DTL) concept to determine the effect (in
percentage terms) of a
increase
TOR's sales from the $750,000 base
level on its earnings per share.
Transcribed Image Text:Problem 4: TOR most recently sold 100,000 units at $7.50 each; its variable operating costs are $3.00 per unit, and its fixed operating costs are $250,000. Annual interest charges total $80,000, and the firm has 8,000 shares of $5 (annual dividend) preferred stock outstanding. It currently has 20,000 shares of common stock outstanding. Assume that the firm is subject to a 40% tax rate. a. At what level of sales (in units) would the firm break even on operations (that is, EBIT $0)? b. Calculate the firm's earnings per share (EPS) in tabular form at (1) the current level of sales and (2) a 120,000-unit sales level. c. Using the current $750,000 level of sales as a base, calculate the firm's degree of operating leverage (DOL). d. Using the EBIT associated with the $750,000 level of sales as a base, calculate the firm's degree of financial leverage (DFL). e. Use the degree of total leverage (DTL) concept to determine the effect (in percentage terms) of a increase TOR's sales from the $750,000 base level on its earnings per share.
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