Calculating the degrees of leverage Acme Inc. forecasts the following income statement for the next year: Income Statement For the Year Ended on December 31 Net sales $960,000 Less: Variable costs 532,000 Less: Fixed costs 123,000 EBIT, or NOI $305,000 Less: Interest 196,000 EBT $109,000 Less: Taxes 43,600 Net income $65,400 Acme Inc. uses no preferred stock in its capital structure. Calculate the degrees of operating, financial, and total leverage for Acme Inc. and select your answers in the following table. DOL 1.40 or 1.64 or 1.72 or 1.81 DFL 1.88 or 2.02 or 2.18 or 2.80 DTL 3.40 or 3.48 or 3.57 or 3.93
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
Calculating the degrees of leverage
| Net sales | $960,000 |
| Less: Variable costs | 532,000 |
| Less: Fixed costs | 123,000 |
| EBIT, or NOI | $305,000 |
| Less: Interest | 196,000 |
| EBT | $109,000 |
| Less: Taxes | 43,600 |
| Net income | $65,400 |
| DOL | 1.40 or 1.64 or 1.72 or 1.81 |
| DFL | 1.88 or 2.02 or 2.18 or 2.80 |
| DTL | 3.40 or 3.48 or 3.57 or 3.93 |
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