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a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before expansion. (For the degree of operating leverage, use the formula: DOL = (S-TVC) For the degree of combined leverage, (S-TVC-FC)

a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before expansion. (For the degree of operating leverage, use the formula: DOL = (S-TVC) For the degree of combined leverage, (S-TVC-FC)

Excel Applications for Accounting Principles
Excel Applications for Accounting Principles
4th Edition
ISBN:9781111581565
Author:Gaylord N. Smith
Publisher:Gaylord N. Smith
ChapterMB: Model-building Problems
Section: Chapter Questions
Problem 8M
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DeSoto Tools Incorporated is planning to expand production. The expansion will cost $300,000, which can be financed either by bonds at an interest rate of 14 percent or by selling 10,000 shares of common stock at $30 per share. The current income statement before expansion is as follows: DESOTO TOOLS INCORPORATED Income Statement 20X1 Sales Variable costs Fixed costs Earnings before interest and taxes Interest expense Earnings before taxes Taxes @ 34% Earnings after taxes Shares Earnings per share $ 1,500,000 450,000 550,000 $ 500,000 100,000 $ 400,000 136,000 $ 264,000 100,000 $ 2.64 After the expansion, sales are expected to increase by $1,000,000. Variable costs will remain at 30 percent of sales, and fixed costs will increase to $800,000. The tax rate is 34 percent a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before (S-TVC) expansion. (For the degree of operating leverage, use the formula: DOL (S-TVC-FC) For the degree of combined leverage, Degree of operating leverage Degree of financial leverage Degree of combined leverage = (S-TVC) use the formula: DCL = These instructions apply throughout this problem.) (S-TVC-FC-I) Note: Round your answers to 2 decimal places.
Transcribed Image Text:DeSoto Tools Incorporated is planning to expand production. The expansion will cost $300,000, which can be financed either by bonds at an interest rate of 14 percent or by selling 10,000 shares of common stock at $30 per share. The current income statement before expansion is as follows: DESOTO TOOLS INCORPORATED Income Statement 20X1 Sales Variable costs Fixed costs Earnings before interest and taxes Interest expense Earnings before taxes Taxes @ 34% Earnings after taxes Shares Earnings per share $ 1,500,000 450,000 550,000 $ 500,000 100,000 $ 400,000 136,000 $ 264,000 100,000 $ 2.64 After the expansion, sales are expected to increase by $1,000,000. Variable costs will remain at 30 percent of sales, and fixed costs will increase to $800,000. The tax rate is 34 percent a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before (S-TVC) expansion. (For the degree of operating leverage, use the formula: DOL (S-TVC-FC) For the degree of combined leverage, Degree of operating leverage Degree of financial leverage Degree of combined leverage = (S-TVC) use the formula: DCL = These instructions apply throughout this problem.) (S-TVC-FC-I) Note: Round your answers to 2 decimal places.
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