a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before expansion. (For the degree of operating leverage, use the formula: DOL = (S-TVC) For the degree of combined leverage, (S-TVC-FC)
a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before expansion. (For the degree of operating leverage, use the formula: DOL = (S-TVC) For the degree of combined leverage, (S-TVC-FC)
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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Transcribed Image Text:DeSoto Tools Incorporated is planning to expand production. The expansion will cost $300,000, which can be financed either by
bonds at an interest rate of 14 percent or by selling 10,000 shares of common stock at $30 per share. The current income statement
before expansion is as follows:
DESOTO TOOLS INCORPORATED
Income Statement 20X1
Sales
Variable costs
Fixed costs
Earnings before interest and taxes
Interest expense
Earnings before taxes
Taxes @ 34%
Earnings after taxes
Shares
Earnings per share
$ 1,500,000
450,000
550,000
$ 500,000
100,000
$ 400,000
136,000
$ 264,000
100,000
$ 2.64
After the expansion, sales are expected to increase by $1,000,000. Variable costs will remain at 30 percent of sales, and fixed costs
will increase to $800,000. The tax rate is 34 percent
a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before
(S-TVC)
expansion. (For the degree of operating leverage, use the formula: DOL
(S-TVC-FC)
For the degree of combined leverage,
Degree of operating leverage
Degree of financial leverage
Degree of combined leverage
=
(S-TVC)
use the formula: DCL =
These instructions apply throughout this problem.)
(S-TVC-FC-I)
Note: Round your answers to 2 decimal places.
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