Integrative Leverage and risk Firm R has sales of 102,000 units at $2.01 per unit, variable operating costs of $1.66 per unit, and fixed operating costs of $6,010. Interest is $10,110 per year. Firm W has sales of 102,000 units at $2.59 per unit, variable operating costs of $0.97 per unit, and fixed operating costs of $62,100. Interest is $17,300 per year. Assume that both firms are in the 40% tax bracket. a. Compute the degree of operating, financial, and total leverage for firm R. b. Compute the degree of operating, financial, and total leverage for firm W. c. Compare the relative risks of the two firms. d. Discuss the principles of leverage that your answers illustrate. a. The degree of operating leverage for firm R is (Round to two decimal places.)
Integrative Leverage and risk Firm R has sales of 102,000 units at $2.01 per unit, variable operating costs of $1.66 per unit, and fixed operating costs of $6,010. Interest is $10,110 per year. Firm W has sales of 102,000 units at $2.59 per unit, variable operating costs of $0.97 per unit, and fixed operating costs of $62,100. Interest is $17,300 per year. Assume that both firms are in the 40% tax bracket. a. Compute the degree of operating, financial, and total leverage for firm R. b. Compute the degree of operating, financial, and total leverage for firm W. c. Compare the relative risks of the two firms. d. Discuss the principles of leverage that your answers illustrate. a. The degree of operating leverage for firm R is (Round to two decimal places.)
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
![**Integrative—Leverage and Risk**
Firm R has sales of 102,000 units at $2.01 per unit, variable operating costs of $1.66 per unit, and fixed operating costs of $6,010. Interest is $10,110 per year. Firm W has sales of 102,000 units at $2.59 per unit, variable operating costs of $0.97 per unit, and fixed operating costs of $62,100. Interest is $17,300 per year. Assume that both firms are in the 40% tax bracket.
a. Compute the degree of operating, financial, and total leverage for firm R.
b. Compute the degree of operating, financial, and total leverage for firm W.
c. Compare the relative risks of the two firms.
d. Discuss the principles of leverage that your answers illustrate.
**a.** The degree of operating leverage for firm R is _____. (Round to two decimal places.)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb3b07c0a-1a3f-49c8-9960-f391d5264025%2F001b7e02-e4ef-4cdc-819a-df9d69d2ff23%2Ffrd4a3h_processed.png&w=3840&q=75)
Transcribed Image Text:**Integrative—Leverage and Risk**
Firm R has sales of 102,000 units at $2.01 per unit, variable operating costs of $1.66 per unit, and fixed operating costs of $6,010. Interest is $10,110 per year. Firm W has sales of 102,000 units at $2.59 per unit, variable operating costs of $0.97 per unit, and fixed operating costs of $62,100. Interest is $17,300 per year. Assume that both firms are in the 40% tax bracket.
a. Compute the degree of operating, financial, and total leverage for firm R.
b. Compute the degree of operating, financial, and total leverage for firm W.
c. Compare the relative risks of the two firms.
d. Discuss the principles of leverage that your answers illustrate.
**a.** The degree of operating leverage for firm R is _____. (Round to two decimal places.)
Expert Solution
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Step 1: Operating leverage
It helps in measuring how the revenue growth will translate into an increase in operating income. It also helps in measuring the leverage and how risky as well as volatile a firm’s operating income is.
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