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Abreviated Income Statement $thousands, except EPS 31-Dec-20 31-Dec-19 Total Revenue 1,743,641      781,963 Cost of Goods...

Abreviated Income Statement

$thousands, except EPS

31-Dec-20

31-Dec-19

Total Revenue

1,743,641

     781,963

Cost of Goods Sold

     431,725

     278,433

Gross Profit

1,311,916

     503,530

Operating Expenses

       68,470

       52,402

Operating Income

1,243,446

     451,128

Interest & Taxes

     453,190

     293,537

Net Income

     790,256

     157,591

EPS, 50,000,000 shares outstanding

        15.81

          3.15

(Round all answers to two decimals, i.e. 12.00)

a) Calculate the degree of operating leverage (DOL). Blank 1

b) Calculate the degree of financial leverage (DFL).   Blank 2

c) Calculate the degree of combined leverage (DCL). Blank 3

What do the degree of operating leverage (DOL, degree of financial leverage (DFL), and degree of combined leverage (DCL) You obtained in the previous question mean? Explain fully using your results.

Solutions

Expert Solution

Figures in thousands
Profitability Statement 31-12-20 31-12-19 % change
Sales $        1,743,641 $        781,963 123%
Less: Variable Cost $            431,425 $        278,433
Contribution $        1,312,216 $        503,530
Less: Fixed Cost $              68,470 $          52,402
Operating Profit/EBIT $        1,243,746 $        451,128 176%
Less: Interest & Tax $            453,190 $        293,537
Profit after tax(PAT) $            790,556 $        157,591 402%
Less: Dividend $                        -   $                   -  
Earning availanble for Equity Shareholders $            790,556 $        157,591
No. of Share                   50,000              50,000
Earning per share(EPS) $                 15.81 $               3.15 402%
a DOL=Contribution/EBIT $                   1.06 $               1.12
b DFL=EBIT/EBT $                   1.57 $               2.86
c DCL=DOL*DFL $                   1.66 $               3.20
OR
a Degree of Operating leverage(DOL) = % change in EBIT/% change in sales
Degree of Operating leverage(DOL) = 176%/123%= 1.43 times
DOL denotes the level of business risk which is dependent on the fixed cost. Its measures the percentage change in EBIT due percentage change in the sales. In the given case DOL is 1.43 times which indicates that if sales change(increases/decreases) by 1%, then EBIT will change by 1.43%.  
b Degree of Financial leverage(DFL) = % change in EPS/% change in EBIT
Degree of Financial leverage(DFL) = 402%/176%= 2.29 times
DFL denotes the level of financial risk which is dependent on the interest cost & preference dividend. Its measures the percentage change in EPS due percentage change in the EBIT. In the given case DOL is 2.29 times which indicates that if EBIT change(increases/decreases) by 1%, then EBIT will change by 2.29%.  
b Degree of Combined leverage(DCL) = % change in EPS/% change in Sales
Degree of Combined leverage(DCL) = 402%/123%= 3.27 times
DCL denotes the level of total risk or combined risk which is dependent on the fixed cost, interest cost & preference dividend. Its measures the percentage change in EPS due percentage change in the Sales. In the given case DOL is 3.27 times which indicates that if Sales change(increases/decreases) by 1%, then EBIT will change by 3.27%.  
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ekkarill92 answered 1 year ago
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