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STERLING TIRE COMPANY Income Statement For the Year Ended December 31, 2013 Sales (30,000 tires at $80 each).. $2,400,000 Less: Variable costs (30,000 tires at $40).. 1,200,000 Fixed costs 500,000 Earnings before interest and taxes (EBIT). $ 700,000 Interest expense.. 55,000 Earnings before taxes (EBT). $ 645,000 Income tax expense (20%). 129,000 Earnings after taxes (EAT). $ 516,000 Given this income statement, compute the following: a. Degree of operating leverage. b. Degree of financial leverage. c. Degree of combined leverage. d. Break-even point in units.

STERLING TIRE COMPANY Income Statement For the Year Ended December 31, 2013 Sales (30,000 tires at $80 each).. $2,400,000 Less: Variable costs (30,000 tires at $40).. 1,200,000 Fixed costs 500,000 Earnings before interest and taxes (EBIT). $ 700,000 Interest expense.. 55,000 Earnings before taxes (EBT). $ 645,000 Income tax expense (20%). 129,000 Earnings after taxes (EAT). $ 516,000 Given this income statement, compute the following: a. Degree of operating leverage. b. Degree of financial leverage. c. Degree of combined leverage. d. Break-even point in units.

Essentials Of Investments
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
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Please, use these formulas that are in the image only.
STERLING TIRE COMPANY Income Statement For the Year Ended December 31, 2013 Sales (30,000 tires at $80 each).. $2,400,000 Less: Variable costs (30,000 tires at $40). 1,200,000 Fixed costs . 500,000 Earnings before interest and taxes (EBIT).. $ 700,000 Interest expense.. 55,000 Earnings before taxes (EBT).. $ 645,000 Income tax expense (20%) 129,000 Earnings after taxes (EAT).. $ 516,000 Given this income statement, compute the following: a. Degree of operating leverage. b. Degree of financial leverage. c. Degree of combined leverage. d. Break-even point in units.
Transcribed Image Text:STERLING TIRE COMPANY Income Statement For the Year Ended December 31, 2013 Sales (30,000 tires at $80 each).. $2,400,000 Less: Variable costs (30,000 tires at $40). 1,200,000 Fixed costs . 500,000 Earnings before interest and taxes (EBIT).. $ 700,000 Interest expense.. 55,000 Earnings before taxes (EBT).. $ 645,000 Income tax expense (20%) 129,000 Earnings after taxes (EAT).. $ 516,000 Given this income statement, compute the following: a. Degree of operating leverage. b. Degree of financial leverage. c. Degree of combined leverage. d. Break-even point in units.
Using these formulas: 1-Breakeven Point Formula: FC Q =p- vc 2-Degree of Operating Leverage (DOL): Percentage change in EBIT Percentage change in sales DOL 3-The formula for calculating the degree of operating leverage at a base sales level, Q, is the following: eX (P – vc) DOL(Q) = Qx (P –- vc) – FC Q: the sales level. P: sale price. vc: variable operating costs per unit. FC: fixed operating costs. 4-The Degree Of Financial Leverage (DFL): Percentage change in EPS Percentage change in EBIT DFL EBIT DFL at base level EBIT = EBIT - I - (PD x 5-degree of total leverage (DTL) Percentage change in EPS Percentage change in sales DTL ex (P – vc) PD DTL at Q units = ex (P – vc) – FC – 1 –(2)
Transcribed Image Text:Using these formulas: 1-Breakeven Point Formula: FC Q =p- vc 2-Degree of Operating Leverage (DOL): Percentage change in EBIT Percentage change in sales DOL 3-The formula for calculating the degree of operating leverage at a base sales level, Q, is the following: eX (P – vc) DOL(Q) = Qx (P –- vc) – FC Q: the sales level. P: sale price. vc: variable operating costs per unit. FC: fixed operating costs. 4-The Degree Of Financial Leverage (DFL): Percentage change in EPS Percentage change in EBIT DFL EBIT DFL at base level EBIT = EBIT - I - (PD x 5-degree of total leverage (DTL) Percentage change in EPS Percentage change in sales DTL ex (P – vc) PD DTL at Q units = ex (P – vc) – FC – 1 –(2)
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