Chapter 10 Sample Test Questions

Chapter 10 Sample Test Questions - Chapter 10 Test...

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Chapter 10 Test Questions Question 1 Specific Mills is reviewing its financial condition. Sales are $18 million from which the firm generated an operating profit of $5,220,000 and a net profit after tax of $2,622,000. The firm’s interest expense was $850,000 and total variable cost was $8,000,000. The firm is expecting an increase in sales of 7%. Based on this data, what would you expect the percentage change in net income to be? a. 7% b. Between 7% and 9% c. Between 11% and 13% d. Between 15% and 17% e. None of the above Answer Question 1 First lets find the DOL = (Sales – VC) / EBIT = ($18,000,000 - $8,000,000) / $5,220,000 = 1.92. Now lets find the DFL = EBIT / (EBIT – I) = $5,220,000 / ($5,220,000 - $850,000) = 1.19. Then DCL = DOL * DFL = 1.92 * 1.19 = 2.28. To get the answer we take the DCL and multiply by the increase in sales or 7% * 2.28 = 16% Answer : D Question 2 An analyst is comparing two firms in the same industry. One of the firms has high operating leverage and the other has low operating leverage. Which of the following
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Chapter 10 Sample Test Questions - Chapter 10 Test...

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