Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 5, Problem 19P
Summary Introduction
To calculate: The degree of combined leverage (DOL) for Mitaka Company.
Introduction:
Degree of combined leverage (DCL):
It summarises the effect of the combination of both operating as well as financial leverages on a firm. It helps in determining the risk of any firm. A company with high DCL will be considered more risky.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Firms in Japan often employ both high operating and financial leverage because of the use of modern technology and close
borrower-lender relationships. Assume the Mitaka Company has a sales volume of 129,000 units at a price of $29 per unit; variable
costs are $9 per unit, and fixed costs are $1,840,000. Interest expense is $404,000.
What is the degree of combined leverage for this Japanese firm? (Round your answer to 2 decimal places.)
Degree of combined leverage
Firms in Japan often employ both high operating and financial leverage because of the use of modern technology and close borrower-
lender relationships. Assume the Mitaka Company has a sales volume of 125,000 units at a price of $25 per unit; variable costs are $5
per unit and fixed costs are $1,800,000. Interest expense is $400,000.
What is the DCL for this Japanese firm? (Round the final answer to 2 decimal places.)
Degree of combined leverage
X
Atech has fixed costs of $7 million and profits of $4 million. Its competitor, ZTech, is roughly the same size and this year earned the same profits, $4 million. However, ZTech operates with fixed costs of $5 million and lower variable costs.a. Which firm has higher operating leverage?b. Which firm will likely have higher profits if the economy strengthens?
Chapter 5 Solutions
Foundations of Financial Management
Ch. 5 - Discuss the various uses for break-even analysis....Ch. 5 - What factors would cause a difference in the use...Ch. 5 - Explain how the break-even point and operating...Ch. 5 - Prob. 4DQCh. 5 - What does risk taking have to do with the use of...Ch. 5 - Discuss the limitations of financial leverage....Ch. 5 - Prob. 7DQCh. 5 - Explain how combined leverage brings together...Ch. 5 - Explain why operating leverage decreases as a...Ch. 5 - Prob. 10DQ
Ch. 5 - Prob. 1PCh. 5 - Prob. 2PCh. 5 - Prob. 3PCh. 5 - Draw two break-even graphs-one for a conservative...Ch. 5 - Prob. 5PCh. 5 - Shawn Pen & Pencil Sets Inc. has fixed costs of ....Ch. 5 - Calloway Cab Company determines its break-even...Ch. 5 - Prob. 8PCh. 5 - Boise Timber Co. computes its break-even point...Ch. 5 - The Sterling Tire Company’s income statement for...Ch. 5 - Prob. 11PCh. 5 - Healthy Foods Inc. sells 50-pound bags of grapes...Ch. 5 - United Snack Company sells 50-pound bags of...Ch. 5 - Prob. 14PCh. 5 - Prob. 15PCh. 5 - Lenow’s Drug Stores and Hall’s Pharmaceuticals...Ch. 5 - The capital structure for Cain Supplies is...Ch. 5 - Sterling Optical and Royal Optical both make glass...Ch. 5 - Prob. 19PCh. 5 - Sinclair Manufacturing and Boswell Brothers Inc....Ch. 5 - DeSoto Tools Inc. is planning to expand...Ch. 5 - Prob. 23PCh. 5 - Prob. 24PCh. 5 - Prob. 25PCh. 5 - Mr. Gold is in the widget business. He currently...Ch. 5 - Delsing Canning Company is considering an...Ch. 5 - Prob. 2WECh. 5 - Prob. 3WECh. 5 - Prob. 4WECh. 5 - Prob. 5WE
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.Similar questions
- ATEch has fixed costs of $8 million and profits of $5 million. Its competitor ZTech is roughly the same size and this year earned the same profits, $5 million. But it operates with fixed costs of $7 million and lower variable costs. what is the degree of operating leverage for each company? which firm would you expect to have profits that are more sensitive to the state of the economy? which firm would you expect to have the higher stock market beta?arrow_forwardATech has fixed costs of $10.0 million and profits of $5 million. Its competitor, ZTech, is roughly the same size and this year earned the same profits, $5 million. However, ZTech operates with fixed costs of only $0.25 million but higher variable costs. Calculate the operating leverage for each firm. DOL ATech DOL ZTecharrow_forwardWhat is the firm's degree of leverage?arrow_forward
- K (Operating leverage) The C. M. Quarles Distributing Company manufactures an assortment of cold air intake systems for high-performance engines. The average selling price for the various units is $650. The associated variable cost is $250 per unit. Fixed costs for the firm average $180,000 annually a. What is the break-even point in units for the company? b. What is the dollar sales volume the firm must achieve to reach the break-even point? c. What is the degree of operating leverage for a production and sales level of 3,000 units for the firm? (Calculate to three decimal places.) d. What will be the projected effect on earnings before interest and taxes if the firm's sales level should increase by 45 percent from the volume noted in part c? a. What is the break-even point in units for the company? units (Round to the nearest whole number)arrow_forwardWhat is AAA Corp.’s projected degree of operating leverage based on the projected sales?arrow_forwardA firm has a degree of operating leverage of 2 and a degree of financial leverage of 1.5 when it has a base sales level of $400,000. What is the firm's degree of total leverage? and Jennifer's Toy Cars has fixed operating costs which total $25,000. It sells its toy cars for $55 per toy and it has variable operating cost of $30 per toy car. Every month it sells 3,000 toy cars. What is the firm's monthly earnings before interest and taxes?arrow_forward
- A firm in a purely competitive industry has a typical cost structure. The normal rate of profit in the economy is 5 percent. This firm is earning $5.50 on every $50 invested by its founders. What is its percentage rate of return? Is the firm earning an economic profit? If so, how large? Will this industry see entry or exit? What will be the rate of return earned by firms in this industry once the industry reaches long-run equilibrium?arrow_forwardThe Mongolian Supply Co. sells its products for an average of $35 per unit with a variable cost per unit of $21. The company has fixed operating costs of $1,050,000. Calculate the firm's operating breakeven point in units. Using a base of 100,000 units, what is the firm's degree of operating leverage?arrow_forwardCompanies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Yeatman Co.: Yeatman Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 Unit sales 5,500 5,200 5,700 5,820 Sales price $42.57 $43.55 $44.76 $46.79 Variable cost per unit $22.83 $22.97 $23.45 $23.87 Fixed operating costs $66,750 $68,950 $69,690 $68,900 This project will require an investment of $25,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project’s four-year life. Yeatman pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project’s net present value (NPV) would be under the new tax law. Determine…arrow_forward
- Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Garida Co.: Garida Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 Unit sales 3,500 4,000 4,200 4,250 Sales price $38.50 $39.88 $40.15 $41.55 Variable cost per unit $22.34 $22.85 $23.67 $23.87 Fixed operating costs $37,000 $37,500 $38,120 $39,560 This project will require an investment of $20,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project's four-year life. Garida pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project's net present value (NPV) would be under the new tax law. Which of the following most closely approximates what…arrow_forward7. Ravi and Ishan are talking about Degree of Operating Leverage and Financial Leverage. Ravi says : Degree of Financial Leverage will be lower for firms with higher tax rates Ishan says: Degree of Operating leverage will increase with sales Only Ravi is correct Only Ishan is correct Both are incorrect 8. The total value of assets in a Balance sheet will increase in which of the following cases: (i) Ramesh exports bought a machine for Rs.50 mn. The transaction was funded by cash in bank account (ii) More Care Ltd bought a machine for Rs. 50 mn. The transaction was funded by a loan of Rs.50 mn (iii) Almighty Ltd bought a machine for Rs.50 mn. The transaction was funded by Rs.25 mn loan and Rs.25 mn of cash in bank account. i,ii and iii only ii and iii only i and iii 9. Companies in an economy are in a process of reducing overtime, and some of the major firms have just decided to make a portion of the workforce temporary. Which of the following could be most likely happening to the…arrow_forwardAt a base sales level of R400,000, a firm has a degree of operating leverage of 2 and a degree of financial leverage of 1.5. What is the firm's degree of total leverage.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Financial leverage explained; Author: The Finance story teller;https://www.youtube.com/watch?v=GESzfA9odgE;License: Standard YouTube License, CC-BY