# B degree of operating financial and total leverage

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B) Degree of operating, financial, and total leverage for Firm W DOL = 100,000 * (2.50-1.00)/ 100,000 * (2.50 – 1.00) – 62,500 = 1.71 EBIT = 2.50*100,000-1.00*100,000-62,500 = 87,500 DFL = 87,500/(87,500-17,500) = 1.25 DTL = DOL * DFL = 1.71 * 1.25 = 2.14 C) Firm R has less operating risk but more financial risk than Firm W. They have equal total leverage. D) Two firms with differing operating and financial structures may be equally leveraged. Question 20: Debt and Financial Risk Sales Probability \$200,000 0.20 300,000 0.60 400,000 0.20 Fixed Operating Costs = \$75,000 Variable Operating Costs = 70% of sales Interest = \$12,000 Tax Rate = 40%
A) EBIT Sales 200,000 Less VC 140,000 Less FC 75,000 EBIT -15,000 Sales 300,000 Less VC 210,000 Less FC 75,000 EBIT 15,000 Sales 400,000 Less VC 280,000 Less FC 75,000 EBIT 45,000 B) Earnings per share, expected EPS, standard deviation of EPS, coefficient of variation 10,000 shares of common stock outstanding EBIT -15,000 Less Interest 12,000 Earnings before taxes -27,000 Less Taxes -10,800 Earnings after taxes -16,200 EPS -1.62 EBIT 15,000 Less Interest 12,000 Earnings before taxes 3,000 Less Taxes 1,200 Earnings after taxes 1,800 EPS 0.18 EBIT 45,000 Less Interest 12,000 Earnings before taxes 33,000 Less Taxes 13,200 Earnings after taxes 19,800 EPS 1.98 Expected EPS = EPSj * Prj = (-1.62*0.20) + (0.18*0.60) + (1.98*0.20) = -0.324 + 0.108 + 0.396 = 0.18
Standard Deviation = EPS = √ (EPS – EPS*) 2 * Pr j =√((-1.62-0.18) 2 *0.20) + ((0.18-0.18) 2 *0.60) + ((1.98-0.18) 2 *0.20) =√1.296 = 1.138
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