Question

In: Finance

“Biscuitville” is very unusual in that it has no debt. How does that affect their DOL and/or DFL

Expert Solution

In financial analysis:

Leverage means the influence of one

financial variable over some other related financial variable.

These financial variables can be sales, contribution, variable or fixed costs, Earnings Before Interest and Tax, Earning per share.

operating leverage, financial leverage, and total leverage are related to the income statement because it shows the effect of one variable/component of income statement on another variable/component of the income statement.

It can be understood clearly from these formulas.

operating leverage= Contribution/EBIT

financial leverage= EBIT/EBT

total leverage= Contribution/EBT

Contribution=sales- variable cost.

EBIT= earnings before interest and tax.

EBT= earnings before tax.

The above 3 are variable/component of the income statement.

Degree of operating leverage is not affected with no debt.

Degree of financial leverage is affected with the use of no debt.

Factors which affect financial leverage are financial fixed costs.

For example: interest on bank loans, preference dividend, interest on debt etc.

Higher Financial leverage represents higher debt financing.

No debt financing represent lower Financial leverage i.e A financial leverage of 1.

jeff jeffy answered 2 years ago

Without using any equations from the book, calculate DOL and DFL implied in these numbers.

Given the following base case scenario: BASE CASEsales $5,000,000Variable costs $1,600,000Cash fixed costs $1,800,000Depreciation Expense $600,000 Interest Expense $400,0001. Calculate the OCF. (0.50 point)2. Calculate the no-tax cash income. (0,50 point)3. Without using any equations from the book, calculate DOL and DFL implied in these numbers. (2 points)

Pick two companies in the same industry. a. Determine their DOL, DFL, and DCL. b. What...

Pick two companies in the same industry. a. Determine their DOL, DFL, and DCL. b. What effect does a change in sales have on their operating income? c. What effect does a change in sales have on earnings per share?

HOW DOES THE INCLUSION OF A DEBT COVENANT AFFECT THE REPORTING OF THE BONDS AND ARE...

HOW DOES THE INCLUSION OF A DEBT COVENANT AFFECT THE REPORTING OF THE BONDS AND ARE THERE ANY DICLOSURE REQUIREMENTS RELATED TO THE COVENANT?

debt to equity ratio: How does a business value on the number scale overall affect a...

debt to equity ratio: How does a business value on the number scale overall affect a business financial well-beng?

According to the Modigliani Miller approach, how does using debt affect the business value?

2020 has been a very unusual year with the worldwide pandemic. Economies around the world have...

2020 has been a very unusual year with the worldwide pandemic. Economies around the world have been greatly affected by it. What has been the impact on the Canadian economy? The objective of this assignment is to find an answer this question. You will research and find answers to the following questions. How has the pandemic affected the Canadian GDP, Unemployment, Inflation and Government deficit? Compare the February numbers with the latest numbers for August. In your opinion, is the...

how even healthy corporations select their DFL with impunity

If the price level rises how does this affect nominal money demand? How does this affect...

If the price level rises how does this affect nominal money demand? How does this affect real money demand? Fully explain your reasoning. (5 pts.)

1. How does collateral affect the interest rate on a bond? How does subordination affect the...

1. How does collateral affect the interest rate on a bond? How does subordination affect the interest rate on a bond too? What else might affect the interest rate on a bond? 2. What is liquidation and reorganization? When should each be used? Please choose one company that has gone through either type of bankruptcy proceeding and describe the circumstances leading up to the filing.

4) How does a tariff affect the government's revenue? How does an import quota affect the...

4) How does a tariff affect the government's revenue? How does an import quota affect the government's revenue? 5) Discuss the reasons why we see trade restrictions. Are any of these reasons valid? 6) Two arguments used to promote trade barriers are the infant-industry argument and the dumping argument. Explain each of these arguments and evaluate whether each one has any flaws.