Ch. 14 HW answers
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Tulsa Community College *
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Course
5013
Subject
Finance
Date
Jan 9, 2024
Type
docx
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13
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1.
Computing
and
interpreting
the
degree
of
operating
leverage
(DOL)
It
is
December
31.
Last
year,
Carter
Chemical
Co.
had
sales
of
$8,000,000,
and
it
forecasts
that
next
year’s
sales
will
be
$7,600,000.
Its
fixed
costs
have been
and
are
expected
to
continue
to
be
$4,400,000,
and
its
variable
cost
ratio
is
12.50%.
Carter’s
capital
structure
consists
of
a
$13.5
million
bank
loan,
on
which
it
pays
an
interest
rate
of
9%,
and
250,000
shares
of
common
equity.
The
company’s
profits are
taxed
at
a
marginal
rate
of
40%.
Given
this
data,
complete
the
following
sentences:
«
The
percentage
change
in
the
company’s
sales
is
0%
V.
«
The
percentage
change
in
Carter’s
EBIT
is
~13.46%
¥
.
«
The
degree
of
operating
leverage
(DOL)
at
$8,000,000
is
2.69
V'
.
Points:
W
1/1
Explanation:
Close
Explanation
~
At
sales
of
$8,000,000,
with
an
expected decrease
to
$7,600,000,
Carter
Chemical
Co.
exhibits
a
degree
of
operating
leverage
(DOL)
of
2.69.
The
degree
of
operating
leverage
(DOL)
is
calculated
as
the
percentage
change
in
the
firm’s
EBIT
divided
by
its
corresponding
percentage
change
in
sales.
That
is:
Percentage
Chang
in
EBIT
Degree
of
operating
leverage
=
fecets
Chaneein
BT
To
calculate
the
component
parts
of
this
equation,
remember
that
Carter's
predicted
decrease
in
sales
from
$8,000,000
last
year
to
$7,600,000
next
year
corresponds
to
a
-5.00%
decrease
in
sales.
That
is:
[(Next
Yoars
Sals
-
Las
Yoar'sSales)]
Last
Year's
Sales
x100
187000000
$8,000,00)
95,000,000
B30
—5.00%
Percentage
Change
in
Sales
=
Based
on
these
sales
values,
the
firm's
corresponding
EBIT
values
and
the
year-to-year
percentage
change
in
EBIT
is:
Last
Year's
EBIT
=
Sales
-
Fixed
Costs
-
Variable Costs
=
$8,000,000
-
$4,400,000
-
$1,000,000
=
$2,600,000
Next
Year’s
EBIT
=
$7,600,000
-
$4,400,000
-
$950,000
=
$2,250,000
The
percentage
change
in
EBIT
is
calculated
as:
Percentage
Change
in
EBIT
—
(NextYers
ULt
Yo'
BOIT)
¢
199
Percentage
Change
in
EBIT
=
20
4100
=
—13.46%
Now
use
these
values
to
calculate
the
firm’s
DOI
13.6%
DOL
=
2%
—
260
A
second
equation
can
also
be
used
to
calculate
the
firm's
DOL.
This
method
relates
the
firm’s
contribution
margin,
or
the
difference
between
its
sales
and
its
variable
costs,
to
the
firm's
eamings.
Therefore,
at
sales
of
$8,000,000,
with
an
expected
decrease
to
$7,600,000,
the
a
degree
of
operating
leverage
(DOL)
can
be
calculated
as:
A
second
equation
can
also
be
used
to
calculate
the
firm's
DOL.
This
method
relates
the
firm's
contribution
margin,
or
the
difference
between
its
sales
and
its
variable
costs,
to
the
firm's
eamings.
Therefore,
at
sales
of
$8,000,000,
with
an
expected decrease
to
$7,600,000,
the
a
degree
of
operating
leverage
(DOL)
can
be
calculated
as:
(Salls_
Vasiablo
Costs)
Degree
of
operating
leverage
—
==
Using
this
method,
the
firm’s
DOL
would
be:
DOL
/58900000
(85000
000x1250%))
'$2,250,000
=
=D
There
are
several
ways
to
use
and
interpret
a
firm's
DOL
value.
Consider
the
following
statement
and
indicate
whether
it
accurately
reflects
the
meaning
or
an
appropriate
use
of
a
firm's
DOL
value.
Activities
that
change
the
distribution
of
a
firm’s
fixed
and
variable
cost
structures,
such
as
outsourcing,
will
affect
a
firm’s
DOL.
True
or
False:
This
statement
accurately
describes
a
firm’s
DOL.
v
©
True
O
False
Points:
M
1/1
Explanation
Close
Explanation
~
Activities
that
change
the
amount
and
type
of
fixed
and
variable
costs,
such
s
the
decision
to
switch
from
self-manufactured
to
outsourced
production processes,
will
have
a
significant
effect
on
the
firm's
DOL.
When
a
firm
outsources
its
production
process,
it
can
reduce
its
fixed
operating
costs,
which
will
reduce
its
DOL.
2.
The
computation
and
interpretation
of
the
degree
of
financial
leverage
(DFL)
It
is
December
31.
Last
year,
Campbell
Construction
had
sales
of
$80,000,000,
and
it
forecasts
that
next
year’s
sales
will
be
$72,000,000.
Its
fixed
costs
have
been—and
are
expected
to
continue
to
be—$32,000,000,
and
its
variable
cost
ratio
is
11.00%.
Campbell’s
capital
structure
consists
of
a
$15
million
bank
loan,
on
which
it
pays
an
interest
rate
of
8%,
and
750,000
shares
of
common
equity.
The
company’s
profits
are
taxed
at
a
marginal
rate
of
40%.
Given
this
data,
complete
the
following
sentences:
Note:
Round
intermediate
calculations
to
two
decimal
places.
«
The
company’s
percentage
change
in
EBIT
is
~18.16%
v
.
«
The
percentage
change
in
Campbell’s
earnings
per
share
(EPS)
is
-18.75%
V
.
«
The
degree
of
financial
leverage
(DFL)
at
$80,000,000
is
1.88
X
.
Points:
NN
0.67
/1
Explanation:
Close
Explanation
~
At
sales
of
$72,000,000,
Campbell
Construction
exhibits
a
degree
of
financial
leverage
(DFL)
of
1.03.
Campbell’s
decrease
in
sales
from
last
year's
$80,000,000
to
$72,000,000
next
year
corresponds
to
a
-10.00%
decrease
in
sales,
which
results
in
a
-18.16%
change
in
EBIT
and
a
-18.75%
change
in
EPS.
The
degree
of
financial
leverage
(DFL)
is
calculated
as
the
percentage
change
in
the
firm's
EPS
divided
by
its
corresponding
percentage
change
in
EBIT.
That
is:
Degree
of
Financial
Leverage
(DFL)
—
M
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The
firm’s
corresponding
EPS and
EBIT
values
and
the
year-to-year
percentage
changes
in
EPS and
EBIT
is:
Earnings
per
Share
(EPS)
=
g
tetheome
The
percentage
change
in
EPS
is
calculated
as:
22,500,000
Last
Year's
EPS
=
Sms000
=
$30.40
s
750,000
shares.
Next
Year’s
EPS
=
=
$24.70
Percentage
Change
in
EPS
—
[(Next
Year's
EPS
-
Last
Years
EPS)
/
Last
Year's
EPS]
x
100
=
(Pl
x
100
=
—18.75%
The
firm’s
corresponding
EBIT
values and
the
year-to-year
percentage
change
in
EBIT
are:
The
firm's
corresponding
EBIT
values
and
the
year-to-year
percentage
change
in
EBIT
are:
EBIT
=
Sales
-
Fixed
Costs
-
Variable
Costs
Last
Year’s
EBIT
=
$80,000,000
—
$32,000,000
—
$8,800,000
=
$39,200,000
Next
Year’s
EBIT
=
$72,000,000
—
$32,000,000
—
$7,920,000
=
$32,080,000
Percentage
Change
in
EBIT
—
[(Next
Years EOIT-
Lust
Years
EBIT
)
.
1)
Then,
the
degree
of
financial
leverage
(DFL)
is
calculated
as
the
percentage
change
in
the
firm's
EPS
divided
by
its
corresponding
percentage
change
in
EBIT.
That
S
s.13%
Degree
of
Financial
Leverage
(DFL)
=
—27%
=
103
The
following
are
the
two
principal
equations
that
can
be
used
to
calculate
a
firm's
DFL
value:
DFL
(at
EBIT
=
§X)
=
omcentase
Chango
m
EPS
c“"’g'“;":;fr
DFL
(at
EBIT
=
$X)
=
EBIT
TEBIT
Tnterest
~
[Preferred
Dividends
/
(1~
Tax
Rate)]]
Consider
the
following
statement
about
DFL,
and
indicate
whether
or
not
it
is
correct.
Assume
that
a
firm's
fixed
capital
costs
remain
constant
across
a
range
of
operating
profit
(EBIT)
values.
The
firm’s
DFL
will
vary across
the
range
of
EBIT
values.
O
True
X
©
False
Explanation:
Close
Explanation
~
As
a
firm’s
operating
profits
increase
and
its
interest
and
dividend
payments
remain
constant,
its
net
income
and
EPS
will
increase.
Because
it
is
unlikely
that
the
percentage changes
in
the
firm's
EPS
and
EBIT
will
be
exactly
proportional,
the
DFL
values
will
vary.
Conversely,
as
a
firm’s
operating
profits
decrease
and
its
interest
and
dividend
payments
remain
constant,
its
net
income
and
EPS
will
decrease.
Again,
because
it
is
unlikely
that
the
percentage
changes
in
EBIT
and
EPS
will
be
proportional,
the
DFL
values
will
vary.
2.
The
computation
and
interpretation
of
the
degree
of
financial
leverage
(DFL)
It
is
December
31.
Last
year,
Galaxy
Corporation
had
sales
of
$80,000,000,
and
it
forecasts
that
next
year’s
sales
will
be
$86,400,000.
Its
fixed
costs
have
been—and
are
expected
to
continue
to
be—$44,000,000,
and
its
variable
cost
ratio
is
15.00%.
Galaxy’s
capital
structure
consists
of
a
$15
million
bank
loan,
on
which
it
pays
an
interest
rate
of
12%,
and
5,000,000
shares
of
outstanding
common
equity.
The
company’s
profits are
taxed
at
a
marginal
rate
of
35%.
Given
this
data,
compute
the
following:
Note:
Round
intermediate
calculations
to
two
decimal
places.
«
The
company’s
percentage
change
in
EBIT
is
22.67%
¥
.
«
The
percentage
change
in
Galaxy’s
earnings
per
share
(EPS)
is
24.22%
¥
.
«
The
degree
of
finandial
leverage
(DFL)
at
$80,000,000
is
1.07
V'
.
Explanation:
Close
Explanation
~
At
sales
of
$86,400,000,
Galaxy
Corporation
exhibits
a
degree
of
financial
leverage
(DFL)
of
1.07.
Remember,
degree
of
financial
leverage
(DFL)
is
calculated
as
the
percentage
change
in
the
firm's
EPS
divided
by
its
corresponding
percentage
change
in
EBIT.
That
is:
Degree
of
Financial
Leverage
(DFL)
=
To
calculate
the
component
parts
of
this
equation,
consider
the
following
table:
Galaxy
Corporation
Revised
Format
Income
Statement
Next Year
This
Year
_
Percentage
Change
Sales,
$86,400,000
$80,000,000
8.00%
Less:
Variable
costs
$12,960,000
$12,000,000
Less:
Fixed costs
$44,000,000
$44,000,000
EBIT
$29,440,000
$24,000,000
22.67%
Less:
Interest
expense
$1,800,000
$1,800,000
Earnings
before
taxes
$27,640,000
$22,200,000
Less:
Taxes
$9,674,000
$7,770,000
Net
income
$17,966,000
$14,430,000
Shares
outstanding
5,000,000
5,000,000
EPS
$3.59
$2.89
24.22%
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Remember
that
Galaxy’s
increase
in
sales
from
$80,000,000
last
year
to
$86,400,000
next
year
corresponds
to
a
8.00%
increase
in
sales
and
provides
a
change
of
22.67%
in
EBIT
and
a
change
of
24.22%
in
EPS.
That
is:
Earnings
per
Share
(EPS)
=
#
The
percentage
change
in
EPS
is
calculated
as:
WEPS
_Sesmow
Last
Year's
EPS
=
000
_
g389
Eps
L
_fmseow
_
Next
Year's
EPS
=
;oppmmames
=
$3.59
Percentage
Change
in
EPS
—
NextYearsBPS
Last
Years
BS
)
s150-s280
=
Taw
x100
=
24.22%
The
firm’s
corresponding
EBIT
values
and
the
year-to-year
percentage
change
in
EBIT
are:
EBIT
=
Sales
-
Fixed
Costs
-
Variable Costs
Last
Year's
EBIT
=
$80,000,000
—
$44,000,000
—
$12,000,000
=
$24,000,000
Next
Year's
EBIT
=
$86,400,000
—
$44,000,000
—
$12,960,000
=
$29,440,000
Next
Year's
EBIT
_Last
Years
BBIT
.
10
Percentage
Change
in
EBIT
=
The
degree
of
financial
leverage
(DFL)
s
calculated
as
the
percentage
change
in
the
firm’s
EPS
divided
by
its
corresponding
percentage
change
in
EBIT.
That
is:
Degree
of
Financial
Leverage
(DFL)
—
3
The
following
are
the
two
principal
equations
that
can
be
used
to
calculate
a
firm's
DFL
value:
DFL
(at
EBIT
=
§X)
=
omcentase
Chango
m
EPS
c“"’g'“;":;fr
-
-
EBIT
DFL
(At
EBIT
=$X)
=
{opr
ot~
Prefored
Dividends
/
(1~
X
Rta)])
Consider
the
following
statement
about
DFL,
and
indicate
whether
or
not
it
is
correct.
All
other
factors
remaining
constant,
the
larger
the
proportion
of
common
equity
used
by
the
firm
in
its
capital
structure,
the
smaller
the
firm’s
DFL.
O
True
X
@
ralse
Close
Explanation
~
Explanation
Firms
whose
capital
structure
contains
more
equity—and
less
debt—financing
will
exhibit
lower
degrees
of
financial
leverage
(DFL).
Remember,
one
way
to
compute
the
firm’s
DFL
is
to
divide
the
firm’s
EBIT
by
its
EBT,
which
is
the
difference
between
EBIT
and
the
firm's
is:
-
EBIT
EBIT
I
-
interest
charges.
That
is:
DFL
=
S0
—
-
-BBIT
.
As
more
equity
is
sed
to
finance
the
firm,
the
less
interest
expense
the
firm
will
incur,
because
of
its
relatively
lower
cost
of
debt
and
amount
borrowed.
This
increases
the
denominator
of
the
DFL
equation
and
decreases
the
overall
DFL
value.
3.
The
computat
n
and
interpretation
of
the
degree
of
coml
ed
leverage
(DCL)
You
and your
colleague,
Gregory,
are
currently
participating
in
a
finance
internship
program
at
Carter
Chemical
Company.
Your
current
assignment
is
to
work
together
to
review
Carter's
current and
projected
income
statements.
You
will
also
assess
the
consequences
of
management’s
capital
structure
and
investment
decisions
on
the
firm'’s
future
riskiness.
After
much
discussion,
you
and
Gregory
decide
to
calculate
Carter’s
degree
of
operating
leverage
(DOL),
degree
of
financial
leverage
(DFL),
and
degree
of
combined
leverage
(DCL)
based
on
this
year's
data
to
gain
insights
into
Carter's
risk
levels.
The
most
recent
income
statement
for
Carter
Chemical
Company
follows.
Carter
is
funded
solely
with
debt
capital
and
common
equity,
and
it
has
2,000,000
shares
of
common
stock
currently
outstanding.
This
Year's
Data
Next
Year’s
Projected
Data
Sales
$60,000,000
$64,500,000
Less:
Variable
costs
36,000,000
38,700,000
Gross
profit
24,000,000
25,800,000
Less:
Fixed
operating
costs
12,000,000
12,000,000
Net
operating
income
(EBIT)
12,000,000
13,800,000
Less:
Interest
expense
1,200,000
1,200,000
Taxable
income
(EBT)
10,800,000
12,600,000
Less:
Tax
expense
(40%)
4,320,000
5,040,000
Net
income
$6,480,000
$7,560,000
Earnings
per
share
(EPS)
$3.24
$3.78
Given
this
information,
complete
the
following
table
and
then
answer
the
questions
that
follow.
When
performing
your
calculations,
round
your
EPS
and
percentage
change
values
to
two
decimal
places.
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Given
this
information,
complete
the
following
table
and
then
answer
the
questions
that
follow.
When
performing
your
calculations,
round
your
EPS
and
percentage
change
values
to
two
decimal
places.
Carter
Chemical
Company
Data
DOL
(Sales
=
$60,000,000)
2.00
Vv
DFL
(EBIT
=
$12,000,000)
111
Vv
DCL
(Sales
=
$60,000,000)
222
v
Points:
m—1/
1
Explanation:
Close
Explanation
~
At
sales
of
$60,000,000,
Carter
Chemical
Company
exhibits
a
DOL
of
2.00,
a
DFL
of
1.11,
and
DCL
of
2.22.
There
are
two
formulas
that
can
be
used
to
calculate
a
firm's
degree
of
operating
leverage
(DOL)
at
a
given
level
of
sales
($60,000,000):
DOL
=
(Sales
-
Variable Costs)
/
EBIT
DOL
=
Percentage
Change
in
EBIT
/
Percentage
Change
in
Sales
Using
either
equation,
the
firm’s
DOL
is
2.00.
That
is:
DOL
(at
Sales
=
$60,000,000)
=
(Sales
-
Variable Costs)
/
EBIT
=
($60,000,000
-
$36,000,000)
/
$12,000,000
=
200
DOL
(at
Sales
=
$60,000,000)
=
Percentage
Change
in
EBIT
/
Percentage
Change
in
Sales
=
{[($13,800,000
-
$12,000,000)
/
$12,000,000]
x
100}
/
{[($64,500,000
~
$60,000,000)
/
$60,000,000]
x
100}
=
15.00%/7.50%
=
200
here
are
also
two
formulas
that
can
be
used
to
calculate
a
firm's
degree
of
financial
leverage
(DFL)
at
a
given
level
of
EBIT
($12,000,000):
DFL
=
(EBIT
-
Interest
Expense)
/
EBIT
DFL
=
Percentage
Change
in
EPS
/
Percentage
Change
in
EBIT
sing
either
equation,
the
firm’s
DFL
is
1.11.
That
is:
DFL
(EBIT
=
$12,000,000)
=
EBIT/
(EBIT
-
Interest
Expense)
$12,000,000
/
($12,000,000
-
1,200,000)
=
11
DFL (EBIT
=
$12,000,000)
Percentage
Change
in
EPS
/
Percentage
Change
in
EBIT
=
{[($3.78
-
$3.24)
/
$3.24]
x
100}
/
{[($13.800,000
-
$12,000,000)
/
$12,000,000]
x
100}
=
16.67%/15.00%
=
111
The
two
formulas
that
can
be
used
to
calculate
the
firm's
degree
of
combined
leverage
(DCL)
at
a
given
level
of
sales
($60,000,000)
are:
DCL
=
DOLXDFL
DCL
=
Percentage
Change
in
EPS
/
Percentage
Change
in
Sales
Using
either
equation,
the
firm’s
DCL
is
2.22.
That
is:
DCL
(Sales
=
$60,000,000)
=
DOL
X
DFL
=
2.00x111
=
222
DCL
(Sales
=
$60,000,000)
=
Percentage
Change
in
EPS
/
Percentage
Change
in
Sales
=
{[($3.78
-
$3.24)
/
$3.24]
x
100}
/
{[($64,500,000
-
$60,000,000)
/
$60,000,000]
x
100}
=
16.67%
/
7.50%
=
222
Everything
else
remaining
constant,
assume
Carter
Chemical
Company
decides
to
sell
520,000
shares
of
preferred
stock
that
would
pay
$4
per
share
per
year
in
cash
dividends.
How
would
this
affect
Carter’s
DOL,
DFL,
and
DCL?
«
The
DOL
would
be
expected
to
remain
constant
v’
.
«
The DFL
would
be
expected
to
remain
constant_X
.
«
The
DCL
would
be
expected
to
remain
constant
X
.
Orinte-
-
R
Explanation:
Close
Explanation
~
The
sale
of
preferred
stock,
another
form
of
fixed-cost
financing,
will
have
no
effect
on
the
firm’s
DOL
but
will
increase
its
DFL.
The
increase
in
the
DFL
results
from
the
reduction
in
the
denominator
of
the
following
DFL
equation:
EBIT
DFL
=
T
Toterwt
-
[Proered
Diviends
71
Tox
Rt}
In
addition,
since
a
firm’s
DCL
is
the
product
of
its
DOL
and
its
DFL,
an
increase
in
the
DFL, with
no
change
in
the
DOL,
will
also
increase
the
firm’s
DCL.
Everything
else
remaining
constant,
assume
Tucker
Manufacturing
decides
to
convert
its
labor-intensive
manufacturing
facility
into
a
capital-intensive
facility
by
laying
off
over
75%
of
its
labor
force
and replacing
the
workers
with
robotic
and
technologically
advanced
manufacturing
equipment.
Assume
that,
over
the
next
five
years,
the
wages
saved
as
a
result
of
the
layoffs
will
pay
for
the
changes
made
to
Tucker’s
plant
and
equipment
changes.
How
would
this
affect
Tucker's
DOL,
DFL,
and
DCL?
«
The
DOL
would
be
expected
to
increase
v.
«
The DFL
would
be
expected
to____decrease
X.
«
The
DCL
would
be
expected
to
increase
v.
Points:
NN
0.67
/1
Explanation:
Close
Explanation
~
The
conversion
of
the
manufacturing
facility
from
one
that
was
previously
labor
intensive
to
one
that
is
capital
intensive
increases
the
firm's
reliance
on
fixed-cost
assets and
simultaneously
decreases
its
use
of
variable-cost
(Iabor) assets.
This
dollar-for-dollar
substitution
of
fixed-cost
assets
for
variable-cost
assets
will
increase
the
firm’s
DOL
but
not
change
the
firm’s
DFL.
Since
the
DCL
is
the
product
of
an
increasing
DOL
and
a
constant
DFL,
then
the
DCL
will
also
increase.
4.
Analyzing
riskiness
using
a
firm's
degree
of
leverage
Select
the
degree
of
leverage
that
completes
the
following
sentence.
The
_degree
of
financial
leverage
(DFL)
¥/
is
the
percentage
change
in
EPS
that
results
from
a
given
percentage
change
in
EBIT.
Points:
mm—1/
1
Close
Explanation
~
The
degree
of
financial
leverage
(DFL)
is
the
percentage
change
in
the
eamings
per
share
(EPS)
that
results
from
a
given
percentage
change
in
the
eamnings
before
interest
and taxes
(EBIT)
and
reflects
the
use
of
debt
in
a
firm's
capital
structure.
The
degree
of
operating
leverage
(DOL)
is
the
percentage
change
in
EBIT
that
resuits
from
a
given
percentage
change
in
sales
and
reflects
the
use
of
fixed
costs
in
a
firm’s
operations.
The
degree
of
combined
leverage
(DCL)
is
the
percentage
change
in
EPS
that
results
from
a
given
percentage
change
in
sales;
it
equals
the
product
of
the
degrees
of
operating
and
financial
leverage.
The
degree
of
combined
leverage
reflects
the
combined
effects
of
these
two
decisions.
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The Fancy Manufacturing Company is considering a new investment. Financial projections for the
investment are tabulated here. The corporate tax rate is 21 percent. Assume all sales revenue is received in
cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year.
All net working capital is recovered at the end of the project.
Year 1
Year 2
a.
Investment
Sales revenue
Operating costs
Depreciation
Net working capital spending 305
Year 0
$ 26,400
C.
$ 13,500
2,950
6,600
205
Year 3
$15,100
3,125 4,300
6,600
6,600
235
$16,500
155
Year 4
$13,000
2,900
6,600
?
Compute the incremental net income of the investment for each year. (Do not round intermediate
calculations and round your answers to the nearest whole number, e.g., 32.)
Compute the incremental cash flows of the investment for each year. (A negative amount should be
b. indicated by a minus sign. Do not round intermediate calculations and round your answers to the
nearest whole number,…
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Solemn Company has an operating leverage of 2.O. Sales for the current year are $100,000 with a
contribution margin of $50,000. Sales are expected to be $150,000 next year. Operating income
for the current year can be expected to increase by what amount over the previous year?
O $25,000
O None of the above
O $75,000
O $50,000
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The following tables contain financial statements for Dynastatics Corporation. Although the company has not been growing, it now plans to expand and will increase net fixed assets (i.e., assets net of depreciation) by $240,000 per year for the next 5 years, and it forecasts that the ratio of revenues to total assets will remain at 1.50. Annual depreciation is 10% of net fixed assets at the beginning of the year. Fixed costs are expected to remain at $64 and variable costs at 80% of revenue. The company’s policy is to pay out two-thirds of net income as dividends and to maintain a book debt ratio of 20% of total capital.
INCOME STATEMENT, 2019(Figures in $ thousands)
Revenue
$
1,800
Fixed costs
64
Variable costs (80% of revenue)
1,440
Depreciation
96
Interest (8% of beginning-of-year debt)
24
Taxable income
176
Taxes (at 40%)
70
Net income
$
106
Dividends
$
71
Addition to…
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The following tables contain financial statements for Dynastatics Corporation. Although the company has not been growing, it now plans to expand and will increase net fixed assets (i.e., assets net of depreciation) by $240,000 per year for the next 5 years, and it forecasts that the ratio of revenues to total assets will remain at 1.50. Annual depreciation is 10% of net fixed assets at the beginning of the year. Fixed costs are expected to remain at $64 and variable costs at 80% of revenue. The company’s policy is to pay out two-thirds of net income as dividends and to maintain a book debt ratio of 20% of total capital.
INCOME STATEMENT, 2019(Figures in $ thousands)
Revenue
$
1,800
Fixed costs
64
Variable costs (80% of revenue)
1,440
Depreciation
96
Interest (8% of beginning-of-year debt)
24
Taxable income
176
Taxes (at 40%)
70
Net income
$
106
Dividends
$
71
Addition to…
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Sales are 150,000. COGS are 100,000. SG&A Overhead is 20,000. Depreciation is 15,000. Interest Expense is 10,000. Capital Expenditures is 15,000. Net Working Capital is not expected to rise by 1,000. The tax rate is 20%. What is FCF?
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7
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Pls show full steps and calculations
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