Please, use these formulas that are in the image only. XYZ company expects in the coming year: sales of 40000 units at $10 per unit, variable operating costs of $4 per unit, fixed operating costs of $30000, interest of $50000, and preferred stock dividends of $24000. The Company is in the 40% tax bracket. a. Compute the following and explain their meaning: 1- Degree of Operating Leverage (DOL). 2- Degree of Financial Leverage (DFL). 3- Degree of Total Leverage (DTL). b. If XYZ company’s Earnings Per Share (EPS) is currently $7.2, estimate its EPS in case of a 10% increase in earnings before interest and tax (EBIT).
Please, use these formulas that are in the image only. XYZ company expects in the coming year: sales of 40000 units at $10 per unit, variable operating costs of $4 per unit, fixed operating costs of $30000, interest of $50000, and preferred stock dividends of $24000. The Company is in the 40% tax bracket. a. Compute the following and explain their meaning: 1- Degree of Operating Leverage (DOL). 2- Degree of Financial Leverage (DFL). 3- Degree of Total Leverage (DTL). b. If XYZ company’s Earnings Per Share (EPS) is currently $7.2, estimate its EPS in case of a 10% increase in earnings before interest and tax (EBIT).
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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Please, use these formulas that are in the image only.
XYZ company expects in the coming year: sales of 40000 units at $10 per unit, variable operating costs of $4 per unit, fixed operating costs of $30000, interest of $50000, and preferred stock dividends of $24000. The Company is in the 40% tax bracket.
a. Compute the following and explain their meaning:
1- Degree of Operating Leverage (DOL).
2- Degree of Financial Leverage (DFL).
3- Degree of Total Leverage (DTL).
b. If XYZ company’s Earnings Per Share (EPS) is currently $7.2, estimate its EPS in case of a 10% increase in earnings before interest and tax (EBIT).
Transcribed Image Text:1-Breakeven Point Formula:
FC
Q =
P– vc
2-Degree of Operating Leverage (DOL):
Percentage change in EBIT
Percentage change in sales
DOL
Q x (P – vc)
Qx (Р — vс) -FC
DOL(Q)
Q: the sales level.
P: sale price.
vc: variable operating costs per unit.
FC: fixed operating costs.
3-The Degree of Financial Leverage (DFL)
Earnings Available for Common Stockholders
EPS
Number of shares of common stock outstanding
Earnings Available for Common Stockholders = EBIT - I - T – PD
Percentage change in EPS
Percentage change in EBIT
DFL =
EBIT
DFL at base level EBIT =
EBIT – I – (PD ×
4-degree of total leverage (DTL):
Percentage change in EPS
Percentage change in sales
DTL =
Q × (P – vc)
DTL at Q units =
PD
Q × (P – vc) – FC –1-,
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