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Unformatted text preview: DOL = 25,000 (10 5) /[25,000(10  5)  80,000] = 2.78 This means that leverage will go down because it results in being further away from the breakeven point, therefore the firm is operating on a larger profit base and leverage is reduced. D. If healthy foods has an annual interest expense of $10,000, calculate the degree of financial leverage at both 20,000 and 25,000 bags Degree of financial leverage = EBIT/ (EBIT  I) At 20,000 bags determine the profit: 20,000 = (80,000 + profit)/ 5 Profit/EBIT = 100,000  80,000 = 20,000 DFL = 20,000/ (20,000  10,000) = 2 At 25,000 bags we already have calculated Profit/EBIT which is 45,000 DFL = 45,000/(45,000  10,000) = 1.29 E. What is the degree of combined leverage at both sales levels. Degree of combined leverage = DOL x DFL At 20,000 bags: DCL = 5 x 2 = 10 At 25,000 bags: DCL = 2.78 x 1.29 = 3.57...
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This note was uploaded on 10/21/2010 for the course FIN 200 AAAA0RWSC4 taught by Professor Mchenry during the Spring '10 term at University of Phoenix.
 Spring '10
 McHenry

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