You and your colleague, Adam, are currently participating in a finance internship program at Ironworks Railroad. Your current assignment is to work together to review Ironworks’s current and projected income statements. You will also assess the consequences of management’s capital structure and investment decisions on the firm’s future riskiness. After much discussion, you and Adam decide to calculate Ironworks’s degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of total leverage (DTL) based on this year’s data to gain insights into Ironworks’s risk levels. The most recent income statement for Ironworks Railroad follows. Ironworks is funded solely with debt capital and common equity, and it has 2,000,000 shares of common stock currently outstanding. This Year’s Data Next Year’s Projected Data Sales $60,000,000 $64,500,000 Less: Variable costs 36,000,000 38,700,000 Gross profit $24,000,000 $25,800,000 Less: Fixed operating costs 12,000,000 12,000,000 Net operating income (EBIT) $12,000,000 $13,800,000 Less: Interest expense 1,200,000 1,200,000 Taxable income (EBT) $10,800,000 $12,600,000 Less: Tax expense (40%) 4,320,000 5,040,000 Net income $6,480,000 $7,560,000 Earnings per share (EPS) $3.24 $3.78 Given this information, complete the following table and then answer the questions that follow. When performing your calculations, round your EPS and percentage change values to two decimal places. Answer: Ironworks Railroad Data DOL (Sales = $60,000,000) DFL (EBIT = $12,000,000) DTL (Sales = $60,000,000) Everything else remaining constant, assume Ironworks Railroad decides to convert its labor-intensive manufacturing facility into a capital-intensive facility by laying off over 75% of its labor force and replacing the workers with robotic and technologically advanced manufacturing equipment. Assume that, over the next five years, the wages saved as a result of the layoffs will pay for the changes made to Ironworks’s plant and equipment changes. How would this affect Ironworks’s DOL, DFL, and DCL? • The DOL would be expected to . • The DFL would be expected to . • The DTL would be expected to .
You and your colleague, Adam, are currently participating in a finance internship program at Ironworks Railroad. Your current assignment is to work together to review Ironworks’s current and projected income statements. You will also assess the consequences of management’s capital structure and investment decisions on the firm’s future riskiness. After much discussion, you and Adam decide to calculate Ironworks’s degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of total leverage (DTL) based on this year’s data to gain insights into Ironworks’s risk levels. The most recent income statement for Ironworks Railroad follows. Ironworks is funded solely with debt capital and common equity, and it has 2,000,000 shares of common stock currently outstanding. This Year’s Data Next Year’s Projected Data Sales $60,000,000 $64,500,000 Less: Variable costs 36,000,000 38,700,000 Gross profit $24,000,000 $25,800,000 Less: Fixed operating costs 12,000,000 12,000,000 Net operating income (EBIT) $12,000,000 $13,800,000 Less: Interest expense 1,200,000 1,200,000 Taxable income (EBT) $10,800,000 $12,600,000 Less: Tax expense (40%) 4,320,000 5,040,000 Net income $6,480,000 $7,560,000 Earnings per share (EPS) $3.24 $3.78 Given this information, complete the following table and then answer the questions that follow. When performing your calculations, round your EPS and percentage change values to two decimal places. Answer: Ironworks Railroad Data DOL (Sales = $60,000,000) DFL (EBIT = $12,000,000) DTL (Sales = $60,000,000) Everything else remaining constant, assume Ironworks Railroad decides to convert its labor-intensive manufacturing facility into a capital-intensive facility by laying off over 75% of its labor force and replacing the workers with robotic and technologically advanced manufacturing equipment. Assume that, over the next five years, the wages saved as a result of the layoffs will pay for the changes made to Ironworks’s plant and equipment changes. How would this affect Ironworks’s DOL, DFL, and DCL? • The DOL would be expected to . • The DFL would be expected to . • The DTL would be expected to .
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
Concept explainers
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Question
You and your colleague, Adam, are currently participating in a finance internship program at Ironworks Railroad. Your current assignment is to work together to review Ironworks’s current and projected income statements. You will also assess the consequences of management’s capital structure and investment decisions on the firm’s future riskiness. After much discussion, you and Adam decide to calculate Ironworks’s degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of total leverage (DTL) based on this year’s data to gain insights into Ironworks’s risk levels.
The most recent income statement for Ironworks Railroad follows. Ironworks is funded solely with debt capital and common equity, and it has 2,000,000 shares of common stock currently outstanding.
|
|
This Year’s Data
|
Next Year’s Projected Data
|
|---|---|---|
| Sales | $60,000,000 | $64,500,000 |
| Less: Variable costs | 36,000,000 | 38,700,000 |
| Gross profit | $24,000,000 | $25,800,000 |
| Less: Fixed operating costs | 12,000,000 | 12,000,000 |
| Net operating income (EBIT) | $12,000,000 | $13,800,000 |
| Less: Interest expense | 1,200,000 | 1,200,000 |
| Taxable income (EBT) | $10,800,000 | $12,600,000 |
| Less: Tax expense (40%) | 4,320,000 | 5,040,000 |
| Net income | $6,480,000 | $7,560,000 |
| Earnings per share (EPS) | $3.24 | $3.78 |
Given this information, complete the following table and then answer the questions that follow. When performing your calculations, round your EPS and percentage change values to two decimal places.
Answer:
|
Ironworks Railroad Data
|
|
|---|---|
| DOL (Sales = $60,000,000) | |
| DFL (EBIT = $12,000,000) | |
| DTL (Sales = $60,000,000) |
Everything else remaining constant, assume Ironworks Railroad decides to convert its labor-intensive manufacturing facility into a capital-intensive facility by laying off over 75% of its labor force and replacing the workers with robotic and technologically advanced manufacturing equipment. Assume that, over the next five years, the wages saved as a result of the layoffs will pay for the changes made to Ironworks’s plant and equipment changes. How would this affect Ironworks’s DOL, DFL, and DCL?
| • | The DOL would be expected to . |
| • | The DFL would be expected to . |
| • | The DTL would be expected to . |
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 5 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education