Question

In: Finance

?Firm R has sales of 99,000 units at $1.95 per? unit, variable operating costs of $1.71...

?Firm R has sales of 99,000 units at $1.95 per? unit, variable operating costs of $1.71 per? unit, and fixed operating costs of $6,080. Interest is $10,180 per year. Firm W has sales of 99,000 units at$2.59 per? unit, variable operating costs of $0.99 per? unit, and fixed operating costs of $62,800. Interest is $17,100 per year. Assume that both firms are in the 40%

tax bracket.??

a. Compute the degree of? operating, financial, and total leverage for firm R.

b. Compute the degree of? operating, financial, and total leverage for firm W.

c. Compare the relative risks of the two firms.

d. Discuss the principles of leverage that your answers illustrate.

Solutions

Expert Solution

FIRM R

SALES = 99000*1.95 = 193050

VC = 99000*1.71 = 169290

CONTIBUTION = S- VC = 193050-169290 = 23760

F.O.C = 6080

EBIT = SALES - V.C - F.O.C = 193050-169290-6080 = 17680

I = 10180

EBIT-I = 17680-10180 = 7500

DEGREE OF OPERATING LEVERAGE = CONTRIBUTION/ EBIT = 23760/17680 = 1.344

DEGREE OF FINANCIAL LEVERAGE = EBIT/EBIT-I = 17680/7500 = 2.357

TOTAL LEVERAGE = O.L*F.L = 1.344*2.357 = 3.168

FIRM W

SALES = 99000*2.59 =256410

VC = 99000*0.99 = 98010

CONTIBUTION = S- VC = 256410 - 98010 = 158400

F.O.C = 62800

EBIT = SALES - V.C - F.O.C = 256410 - 98010 - 62800 = 95600

I = 17100

EBIT-I = 95600 - 17100 = 78500

DEGREE OF OPERATING LEVERAGE = CONTRIBUTION/ EBIT = 158400/95600 = 1.657

DEGREE OF FINANCIAL LEVERAGE = EBIT/EBIT-I = 95600/78500 = 1.218

TOTAL LEVERAGE = O.L*F.L = 1.657*1.218 = 2.018

a) FIRM Rs DEGREE OF OPERATING LEVERAGE 1.344

DEGREE OF FINANCIAL LEVERAGE 2.357

TOTAL LEVERAGE 3.168

b) FIRM Ws DEGREE OF OPERATING LEVERAGE 1.657

DEGREE OF FINANCIAL LEVERAGE 1.218

TOTAL LEVERAGE 2.018

c) FIRM R IS HAVING DOL LESSER THAN FIRM W. HERE FIRM R DEPENDS MORE ON VARIABLE COST FACTORS IN ITS OPERATIONS. SO FIRM R CANNOT TAKE MORE ADVANTAGE OF ITS FIXED COST FACTORS.

FIRM W IS HAVING DFL LESSER THAN FIRM R. HERE FIRM W DEPENDS MORE ON DEBTS. SO FIRM W HAS TO MAINTAIN ENOUGH PROFITABILITY AND LIQUID SOURCES TO PAY INTEREST.

OVERALL, FIRM W IS LAGGING BEHIND COMPARED TO FIRM R AS ITS TOTAL LEVERAGE IS LESSER THAN THAT OF FIRM R.

d) PRINCIPLES OF LEVERAGES

DEGREE OF OPERATING LEVERAGE DESCRIBES ABOUT OPERATIONAL EFFICIENCY TO ENHANCE OPERATING PROFITABILITY.

DEGREE OF FINANCIAL LEVERAGE DESCRIBES ABOUT TRADING ON EQUITY LEADING TO GET TAX BENEFITS ON ACCOUNT OF INTEREST PAID.

TOTAL LEVERAGE SHOWS OVERALL EFFICIENCY OF THE FIRM TO ENHANCE PROFITABILITY AND WEALTH OF SHAREHOLDERS.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Integrativelong dash—Leverage and risk???Firm R has sales of 97,000 units at $1.97 per? unit, variable operating...

Integrativelong dash—Leverage and risk???Firm R has sales of 97,000 units at $1.97 per? unit, variable operating costs of $1.73 per? unit, and fixed operating costs of $6,070. Interest is $10,150 per year. Firm W has sales of 97,000 units at $2.52 per? unit, variable operating costs of $0.98 per? unit, and fixed operating costs of $62,600. Interest is $17,100 per year. Assume that both firms are in the 40% tax bracket.?? a. Compute the degree of? operating, financial, and total...

Company M has sales of 200,000 units at $2 per unit, variable operating costs of $1.5...

Company M has sales of 200,000 units at $2 per unit, variable operating costs of $1.5 per unit, and fixed operating costs of $4,000.Interst is $8,000 per year. Company N has sales of 200,000 units at $2.5 per unit, variable operating costs of $1 per unit, and fixed operating costs of $62,500. Interest is $17,500 per year. Assume that both companies are in the 30% tax bracket. Compute the operating breakeven point ( units& dollars) for Company M and N...

P13–16Integrative: Leverage and risk Firm R has sales of 100,000 units at $2.00 per unit, variable...

P13–16Integrative: Leverage and risk Firm R has sales of 100,000 units at $2.00 per unit, variable operating costs of $1.70 per unit, and fixed operating costs of $6,000. Interest is $10,000 per year. Firm W has sales of 100,000 units at $2.50 per unit, variable operating costs of $1.00 per unit, and fixed operating costs of $62,500. Interest is $17,500 per year. Assume that both firms are in the 40% tax bracket. Compute the degree of operating, financial, and total...

Given Sales in units 10,000 Variable manufacturing costs per unit 5 Variable administrative costs per unit...

Given Sales in units 10,000 Variable manufacturing costs per unit 5 Variable administrative costs per unit 2 Fixed manufacturing costs per unit 2 Fixed administrative costs per unit 1 Variable costs 75% of sales Selling price per unit? $2.22 $9.33 $17.50 $20 Given for XM Company the following data for January 20X1. Direct material purchased and used in production accounted for $ 50000 Units purchased 5000 The standard units 4200 Managers estimate price variance not to exceed +1% of the...

P13-16. Integrative—Leverage and risk Firm R has sales of 100,000 units at $2.00 per unit, variable...

P13-16. Integrative—Leverage and risk Firm R has sales of 100,000 units at $2.00 per unit, variable operating costs of $1.70 per unit, and fixed operating costs of $6,000. Interest is $10,000 per year. Firm W has sales of 100,000 units at $2.50 per unit, variable operating costs of $1.00 per unit, and fixed operating costs of $62,500. Interest is $17,500 per year. Assume that both firms are in the 40% tax bracket. a. Compute the degree of operating, financial, and...

Alberts Enterprises has sales of 3,000 units at $80 per unit. Variable costs are 35% of...

Alberts Enterprises has sales of 3,000 units at $80 per unit. Variable costs are 35% of the sales price. If total fixed costs are $66,000, what is the the degree of operating leverage?

A project has a projected sales price of $99 a unit, variable costs per unit of...

A project has a projected sales price of $99 a unit, variable costs per unit of $58, annual fixed costs of $238,000, and annual depreciation of $139,000. The tax rate is 22 percent. What is the contribution margin for an analysis using sales units of 12,800? Multiple Choice $27.06 $38.97 $22.41 $41.00 $42.64

2) Grey Products has fixed operating costs of $380,000, variable operating costs of $18 per unit,...

2) Grey Products has fixed operating costs of $380,000, variable operating costs of $18 per unit, and a selling price of $65 per unit. a.Calculate the operating breakeven point in units. b.Calculate the firm’s EBIT at 9,000, 10,000, and 11,000 units, respectively. c.With 10,000 units as a base, what are the percentage changes in units sold and EBIT as sales move from the base to the other sales levels used in part 2? d.Use the percentages computed in part 3...

Sales price per unit for product X is $90. The variable costs per unit and total...

Sales price per unit for product X is $90. The variable costs per unit and total fixed costs are as follows: Variable costs per unit: Fixed costs: Machining $25 Depreciation $ 40,000 Packaging 15 Maintenance 31,000 Total variable $40 Cleaning 9,000 Real estate tax 5,000 Total fixed $85,000 Using Contribution Margin technique, calculate Sales Revenue and Sales Units at Break-Even point. (b) If the current level of sales is 2,300 units, by what percentage can sales decrease before the...

Penny Company sells 25,000 units at $59 per unit. Variable costs are $29 per unit, and...

Penny Company sells 25,000 units at $59 per unit. Variable costs are $29 per unit, and loss from operations is ($50,000). Determine the following: Round the contribution margin ratio to one decimal place. a. Unit contribution margin $ per unit b. Contribution margin ratio % c. Fixed costs per unit at production of 25,000 units $ per unit

Subjects