Sales (35,000 tires at $90 each) Variable costs (35,000 tires at $45) Fixed costs Earnings before interest and taxes (EBIT) Interest expense Earnings before taxes (EBT) Income tax expense (30%) Earnings after taxes (EAT) a. Compute the degree of operating leverage. Note: Round your answer to 2 decimal places. Degree of operating leverage b. Compute the degree of financial leverage. Note: Round your answer to 2 decimal places. Degree of financial leverage c. Compute the degree of combined leverage. Note: Round your answer to 2 decimal places. Degree of combined leverage $ 3,150,000 1,575,000 550,000 $ 1,025,000 57,500 $ 967,500 290, 250 $ 677,250 d. Compute the break-even point in units. Note: Round your answer to the nearest whole number.
Sales (35,000 tires at $90 each) Variable costs (35,000 tires at $45) Fixed costs Earnings before interest and taxes (EBIT) Interest expense Earnings before taxes (EBT) Income tax expense (30%) Earnings after taxes (EAT) a. Compute the degree of operating leverage. Note: Round your answer to 2 decimal places. Degree of operating leverage b. Compute the degree of financial leverage. Note: Round your answer to 2 decimal places. Degree of financial leverage c. Compute the degree of combined leverage. Note: Round your answer to 2 decimal places. Degree of combined leverage $ 3,150,000 1,575,000 550,000 $ 1,025,000 57,500 $ 967,500 290, 250 $ 677,250 d. Compute the break-even point in units. Note: Round your answer to the nearest whole number.
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:Sales (35,000 tires at $90 each)
Variable costs (35,000 tires at $45)
Fixed costs
Earnings before interest and taxes (EBIT)
Interest expense
Earnings before taxes (EBT)
Income tax expense (30%)
Earnings after taxes (EAT)
a. Compute the degree of operating leverage.
Note: Round your answer to 2 decimal places.
Degree of operating leverage
b. Compute the degree of financial leverage.
Note: Round your answer to 2 decimal places.
Degree of financial leverage
c. Compute the degree of combined leverage.
Note: Round your answer to 2 decimal places.
Degree of combined leverage
$ 3,150,000
1,575,000
550,000
$ 1,025,000
57,500
$ 967,500
290,250
$ 677,250
d. Compute the break-even point in units.
Note: Round your answer to the nearest whole number.
Expert Solution
Step 1
The following formulas are used to calculated first three subparts.
Degree of operating leverage(DOL) =
Where, Contribution = Sales - Variable cost
Degree of financial leverage(DFL) =
Degree of combined leverage(DCL) =
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