sol-final-q1-q4 - 1.

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1. No, higher leverage means higher risk. Higher leverage implies that profits will change a  lot if sales change by 1%. So if sales increase, higher leverage means profits will  increase a lot but if sales decrease, higher leverage means profits will decrease a lot. 2. Sales = 100,000 units x $100 = $ 10,000,000 price per unit = $100 CM = 60% of sales = $ 6,000,000 cm per unit = $60 BE = F/[cm per unit]  so 50,000 = F/60 Fixed cost = 3,000,000 EBIT increase 10%, EPS increase 15% means: DFL = 1.5 2.1. DOL = CM/[CM – F] = 6,000,000/[6,000,000 – 3,000,000] =  2 2.2. Find DCL first; DCL = DOL*DFL = 2*1.5 = 3 So if sales increase 20%, EPS will increase 20%*3  = 60% 2.3. If economy is very good, we can expect that sales will increase. So in order to  maximize the increase in profits, we should increase leverage. In order to increase  the DOL, the firm can use more fixed cost and less variable cost by using more 
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This note was uploaded on 07/11/2011 for the course FINANCE fin 3701 taught by Professor Tengihla during the Spring '11 term at Assumption College.

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sol-final-q1-q4 - 1.

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