Videos
A
To calculate: The expected profit based on the given expectation is to be determined.
Introduction:
The expected profit can be defined as the probability to get the certain profit times the profit on business.
Degree of leverage is used to measure the change that will occur in operating income of the company when there is any change in sales.
A
Answer to Problem 17PS
The expected profit is
Explanation of Solution
The following formula will be used for the calculation of the expected profit −
Equ (1)
Given that −
Revenue = $120,000
Fixed costs = $30,000
Revenue costs 
Put the given values in Equ (1) −
Expected profit 
B
To calculate: the degree of operating leverage based on the estimate of the fixed cost and expected profits.
Introduction:
The expected profit can be defined as the probability to get the certain profit times the profit on business.
Degree of leverage is used to measure the change that will occur in operating income of the company when there is any change in sales.
B
Answer to Problem 17PS
The degree of operating leverage is 
Explanation of Solution
The following formula will be used for the calculation of the degree of the operating leverage −
Equ (2)
Given that −
Fixed costs = $30,000
Expected profits = $50,000
Put the given values is Equ (2)
DOL = 
Or
The degree of operating leverage = 
C
To calculate: the decrease in profits when sales are below 10% expectation.
Introduction:
The expected profit can be defined as the probability to get the certain profit times the profit on business.
Degree of leverage is used to measure the change that will occur in operating income of the company when there is any change in sales.
C
Answer to Problem 17PS
The decrease in profits is 
Explanation of Solution
The following formula will be used for the calculation of the expected profit −
Equ (3)
Given that −
DOL = 1.6
Given that −
Revenue = $120,000
Fixed costs = $30,000
Revenue costs 
Decrement in sales = 
Put the given values in Equ (3)
The calculation of the profit after the decrement in sale can be given as −
Expected profit after the decrement in sale = 
From the part (a), expected profit before decrement in sale 
Then the decrease in profit = 
D
To calculate: It is to be proved that the percentage decrease in profits equal to the DOL times 10% drop in sales.
Introduction:
The expected profit can be defined as the probability to get the certain profit times the profit on business.
Degree of leverage is used to measure the change that will occur in operating income of the company when there is any change in sales.
D
Answer to Problem 17PS
The percentage decrease in profit is
Explanation of Solution
The following formula will be used for the calculation of the percentage decrease −
Equ (4)
Put the calculated values in Equ (4)
The percentage decrease = 
which prove that the decrease in profits equal to the DOL times 
drop in sales.
E
To calculate: The largest percentage shortfall in sales relative to the original expectation.
Introduction:
The expected profit can be defined as the probability to get the certain profit times the profit on business.
Degree of leverage is used to measure the change that will occur in operating income of the company when there is any change in sales.
E
Answer to Problem 17PS
The decrease in sales is 
Explanation of Solution
The following formula will be used for the calculation of the decrease in sales −
Equ (5)
Given that −
DOL = 1.6
Put the given value in Equ (5)
The decrease in sales = 
F
To calculate: The break-even sales at this point are to be determined.
Introduction:
The expected profit can be defined as the probability to get the certain profit times the profit on business.
Degree of leverage is used to measure the change that will occur in operating income of the company when there is any change in sales.
The break-even point can be defined as the point at which total cost and total revenue are equal to each other or even to each other.
F
Answer to Problem 17PS
The break-even sale is
Explanation of Solution
From the above the revenue which decreases by 
and which is 
of the original revenue.
The following formula will be used for the calculation of the break-even sales −
Equ (6)
Put the given value in above Equ
Then the break-even sales = $45,000
G
To calculate: The profit at break-even level of sales to prove that the part (f) is correct.
Introduction:
The expected profit can be defined as the probability to get the certain profit times the profit on business.
Degree of leverage is used to measure the change that will occur in operating income of the company when there is any change in sales.
The break-even point can be defined as the point at which total cost and total revenue are equal to each other or even to each other.
G
Answer to Problem 17PS
The expected profit at break-even level is $0.
Explanation of Solution
The following formula will be used for the calculation of the expected profit at the break-even level −
Equ (7)
Given that −
Revenue = $45,000
Fixed costs = $30,000
Revenue costs 
Put the given values is above Equ (7) −
The expected profit = $0, this shows that the answer of the part (f) is correct.
Want to see more full solutions like this?
Chapter 17 Solutions
EBK INVESTMENTS
- The Fortune Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 24 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Year 0 Year 1 Year 2 Year 3 Year 4 Investment $ 28,000 Sales revenue $ 14,500 $ 15,000 $ 15,500 $ 12,500 Operating costs 3,100 3,200 3,300 2,500 Depreciation 7,000 7,000 7,000 7,000 Net working capital spending 340 390 440 340 ?arrow_forwardWhat are the six types of alternative case study compositional structures (formats)used for research purposes, such as: 1. Linear-Analytical, 2. Comparative, 3. Chronological, 4. Theory Building, 5. Suspense and 6. Unsequenced. Please explainarrow_forwardFor an operating lease, substantially all the risks and rewards of ownership remain with the _________. QuestFor an operating lease, substantially all the risks and rewards of ownership remain with the _________: A) Tenant b) Lessee lessor none of the above tenant lessee lessor none of the aboveLeasing allows the _________ to acquire the use of a needed asset without having to make the large up-front payment that purchase agreements require Question 4 options: lessor lessee landlord none of the abovearrow_forward
- How has AirBnb negatively affected the US and global economy? How has Airbnb negatively affected the real estate market? How has Airbnb negatively affected homeowners and renters market? What happened to Airbnb in the Tax Dispute in Italy?arrow_forwardHow has AirBnb positively affected the US and global economy? How has Airbnb positively affected the real estate market? How has Airbnb positively affected homeowners and renters market?arrow_forwardD. (1) Consider the following cash inflows of a financial product. Given that the market interest rate is 12%, what price would you pay for these cash flows? Year 0 1 2 3 4 Cash Flow 160 170 180 230arrow_forward
- Explain why financial institutions generally engage in foreign exchange tradingactivities. Provide specific purposes or motivations behind such activities.arrow_forwardA. In 2008, during the global financial crisis, Lehman Brothers, one of the largest investment banks, collapsed and defaulted on its corporate bonds, causing significant losses for bondholders. This event highlighted several risks that investors in corporate bonds might face. What are the key risks an investor would encounter when investing in corporate bonds? Explain these risks with examples or academic references. [15 Marks]arrow_forwardTwo companies, Blue Plc and Yellow Plc, have bonds yielding 4% and 5.3%respectively. Blue Plc has a credit rating of AA, while Yellow Plc holds a BB rating. If youwere a risk-averse investor, which bond would you choose? Explain your reasoning withacademic references.arrow_forward
- B. Using the probabilities and returns listed below, calculate the expected return and standard deviation for Sparrow Plc and Hawk Plc, then justify which company a risk- averse investor might choose. Firm Sparrow Plc Hawk Plc Outcome Probability Return 1 50% 8% 2 50% 22% 1 30% 15% 2 70% 20%arrow_forward(2) Why are long-term bonds more susceptible to interest rate risk than short-term bonds? Provide examples to explain. [10 Marks]arrow_forwardDon't used Ai solutionarrow_forward
