Company TechGear Ltd. is a technology company that manufactures and sells smartphones. They are currently analyzing their financial structure to understand how changes in sales and financing can impact their profitability and risk calculating the leverage position. The CFO of TechGear obtained the following information for the calculation: Sales: Fixed Costs: Variable Costs per Smartphone: Selling Price per Smartphone: Interest Expense: Total Common Shares Outstanding: Total Preferred Shares Outstanding: Preferred Dividend Per Share: Tax Rate 50,000 units BDT 80,000,000 BDT 15,000 BDT 20,000 BDT 20,000,000 1,000,000 600,000 BDT 10 40% a. Calculate the Degree of Operating Leverage, Degree of Financial Leverage, and Degree of Total Leverage for the company. b. What would happen to the company's leverage positions if its existing mobile phone sales drop by 20% due to a new competitor's entry into the smartphone business? c. Compare and comment on the riskiness of the company under two scenarios in (a) and (b). Briefly explain how the inclusion of fixed costs affects a company's risk and profitability under the above scenarios.
Company TechGear Ltd. is a technology company that manufactures and sells smartphones. They are currently analyzing their financial structure to understand how changes in sales and financing can impact their profitability and risk calculating the leverage position. The CFO of TechGear obtained the following information for the calculation: Sales: Fixed Costs: Variable Costs per Smartphone: Selling Price per Smartphone: Interest Expense: Total Common Shares Outstanding: Total Preferred Shares Outstanding: Preferred Dividend Per Share: Tax Rate 50,000 units BDT 80,000,000 BDT 15,000 BDT 20,000 BDT 20,000,000 1,000,000 600,000 BDT 10 40% a. Calculate the Degree of Operating Leverage, Degree of Financial Leverage, and Degree of Total Leverage for the company. b. What would happen to the company's leverage positions if its existing mobile phone sales drop by 20% due to a new competitor's entry into the smartphone business? c. Compare and comment on the riskiness of the company under two scenarios in (a) and (b). Briefly explain how the inclusion of fixed costs affects a company's risk and profitability under the above scenarios.
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
Related questions
Question
Transcribed Image Text:Problem 3
Company TechGear Ltd. is a technology company that manufactures and sells smartphones. They are
currently analyzing their financial structure to understand how changes in sales and financing can
impact their profitability and risk calculating the leverage position. The CFO of TechGear obtained the
following information for the calculation:
Sales:
Fixed Costs:
Variable Costs per Smartphone:
Selling Price per Smartphone:
Interest Expense:
Total Common Shares Outstanding:
Total Preferred Shares Outstanding:
Preferred Dividend Per Share:
Tax Rate
50,000 units
BDT 80,000,000
BDT 15,000
BDT 20,000
BDT 20,000,000
1,000,000
600,000
BDT 10
40%
a. Calculate the Degree of Operating Leverage, Degree of Financial Leverage, and Degree of
Total Leverage for the company.
b.
What would happen to the company's leverage positions if its existing mobile phone sales drop
by 20% due to a new competitor's entry into the smartphone business?
c. Compare and comment on the riskiness of the company under two scenarios in (a) and (b).
Briefly explain how the inclusion of fixed costs affects a company's risk and profitability under
the above scenarios.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education