Sam Holdings is planning to open a new wholesaling operation. The target operating profit margin is 25%. The unit contribution margin will be 40% of sales. Average annual sales are forecast to be $4,250,000. The firm's total asset is $8,750,000 with debt-asset ratio of 40%. The firm pays 12% interest on the debt and has 100,000 common stocks. The firm is subjected to corporate tax rate of 28%. How much is the fixed cost for the operation (assuming 25% target operating profit margin is achieved). What is the breakeven point in dollars for the firm? What is the degree of operating leverage (DOL)? What is the degree of combined/total leverage (DCL/DTL)?

Sam Holdings is planning to open a new wholesaling operation. The target operating profit margin is 25%. The unit contribution margin will be 40% of sales. Average annual sales are forecast to be $4,250,000. The firm's total asset is $8,750,000 with debt-asset ratio of 40%. The firm pays 12% interest on the debt and has 100,000 common stocks. The firm is subjected to corporate tax rate of 28%. How much is the fixed cost for the operation (assuming 25% target operating profit margin is achieved). What is the breakeven point in dollars for the firm? What is the degree of operating leverage (DOL)? What is the degree of combined/total leverage (DCL/DTL)?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 20P

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Concept explainers

Conversion Cycle

Conversion cycle is also known as cash cycle or net operating cycle. Conversion cycle refers to how much time a company takes to turn its investments which is done from stock or any other financial resources into cash flows from sales.

Question

How much is the fixed cost for the operation (assuming 25% target operating profit margin is achieved).
What is the breakeven point in dollars for the firm?
What is the degree of operating leverage (DOL)?
What is the degree of combined/total leverage (DCL/DTL)?

Leveraging special tenchniques in analyzing historical data to predict future trends. Forecasting covers the methods and types of forecasting and their application to case studies.

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1.Calculation of Fixed Cost of the Operation:

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