ch6_p2sol - Text Problem Solutions Formulas: 0BBREAK-EVEN...

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295 CHAPTER 6: BREAK-EVEN AND LEVERAGE ANALYSIS Solutions 2. Income Statements for Cymer, Inc., from 2005 to 2007 appear below. a. Enter the data into your worksheet. Assume that 70% of SG&A expense is a variable cost, with the balance being a fixed cost. Assume that R&D expense is a fixed cost. b. Given that Cymer is a manufacturing company, would you expect that it would have more operating leverage or financial leverage? Possible Answer: The fact that Cymer is a manufacturing company does not imply higher operating leverage than financial leverage. There are many examples of manufacturing firms with operating leverage greater than financial leverage and vice versa. The only possible inference associated with manufacturing firms is the high likelihood of a significant operating leverage, which may be insignificant at some service companies. Worksheet:
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0BBREAK-EVEN AND LEVERAGE ANALYSIS 296
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Unformatted text preview: Text Problem Solutions Formulas: 0BBREAK-EVEN AND LEVERAGE ANALYSIS Text Problem Solutions 297 c. Calculate the degree of operating leverage for each year using the assumptions from part a. Use net operating income, instead of EBIT, in the denominator of your calculation. d. Calculate the degree of financial leverage for each year. e. Calculate the degree of combined leverage for each of the three years. Does it appear that Cymers leverage measures have been increasing or decreasing over this period? Worksheet: Formulas: 0BBREAK-EVEN AND LEVERAGE ANALYSIS Text Problem Solutions 298 f. Create a Line chart that shows how the various leverage measures have changed over this five-year period. 0.00 Dec 07 Dec 06 Dec 05 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 Leverage Measures Over Time Degree of Operating Leverage Degree of Financial Leverage Degree of Combined Leverage...
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This note was uploaded on 02/14/2011 for the course FINANCE 615 taught by Professor Green during the Fall '09 term at UMBC.

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ch6_p2sol - Text Problem Solutions Formulas: 0BBREAK-EVEN...

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